Potential estate tax reforms: Proactive strategies for wealth preservation

The American Housing and Economic Mobility Act of 2024, first proposed in early 2024, aims to address housing affordability and economic challenges nationwide. The bill promotes the development of approximately three million new housing units to help meet demand and stabilize housing prices. Central to the bill's funding are proposed tax changes that could affect estate and gift taxes, as well as other components used in various estate planning arrangements. These proposed changes would come into effect the day after enactment, possibly retroactive to January 1, 2025.?

Even though these are only potential changes, now is a great time for advisors to approach their clients, review their estate plans, and educate them on what could be on the horizon. Opportunities to make pre-emptive gifts, restructure trusts, and employ tax-efficient wealth preservation techniques are critical discussion topics. Given the substantial impact these changes could have, proactive planning is essential to safeguarding wealth and ensuring clients’ estate plans align with their long-term goals.

Overview of potential changes

• Reduced estate tax exemption: Under the new proposal, the estate tax exemption would drop from $13.61 million to $3.5 million per person, a 74.2% reduction. For married couples, the exemption will fall from $27.22 million to $7 million, drastically increasing the number of estates subject to estate taxes.
• Annual gift exclusion limits: The proposal would reduce the annual gift exclusion from $18,000 to $10,000 per donee and introduce a cumulative limit of $20,000 annually.

• Grantor trusts included in taxable estates: Grantor trusts would be included in a client’s taxable estate, effectively negating some of their tax-savings benefit.?
• Reduced generation-skipping tax (GST) exemption limits: The exemption would be reduced from $13.61 million to $3.5 million per individual, significantly limiting dynasty trusts' ability to transfer large amounts of wealth to multiple generations without GST taxes.
• Restrictions on grantor-retained annuity trusts (GRATs): The proposal would impose new limits on GRATs, including a minimum term of 10 years and a requirement for a minimum 10% remainder interest, effectively eliminating zeroed-out GRATs.
• New limitations for family-controlled entities: Under the proposal, valuation discounts will be disallowed for family-controlled entities, meaning the full fair market value of transferred interests will now be subject to estate and gift tax.

To learn more about proactive strategies you can use to help your clients prepare for these estate tax changes, download our whitepaper.