Podcast Summary: The Practical Planner

Episode: “How Election Results Can Impact Estate Tax Strategies”

Date: December 4, 2024

Hosts: Thomas Kopelman, Anne Rhodes, Dave (estate planning expert)

Episode Overview

This episode delves into how recent election results—where Republicans secured the House, Senate, and Presidency—are likely to impact the trajectory of estate tax law, particularly the anticipated sunset of the Tax Cuts and Jobs Act (TCJA) provisions. The hosts discuss how advisors should rethink strategies for clients, emphasizing the importance of flexibility and caution in estate planning, especially in light of continued political shifts and legislative uncertainty.

Key Discussion Points & Insights

1. The Current Estate Tax Landscape and Political Changes

• TCJA Sunset Was Expected: Until the election, consensus expected the estate tax exemption to drop from its "unprecedentedly high" $13.61 million to around $7 million due to the TCJA sunsetting. (01:05)
• Election Results Shift Outlook: With unified Republican control, it's increasingly likely the high exemption will be extended or even inflation-adjusted upward, reducing immediate estate tax planning urgency for many clients.
  • Quote:

    “It’s all the more likely that we are not going to see sunset...the estate tax exemption...is going to remain far higher.”
    —Dave (01:55)

• Implications: Many clients who took drastic steps to plan for the exemption drop may need to reconsider. For some, strategies like gifting large assets out of their estate could now be less favorable due to lost step-up in basis without corresponding estate tax benefit.

2. Rethinking Classic Trust Structures and Formula Funding

• Outdated Documents: Many estate plans use old formula funding which can, in today's high exemption environment, lead to overfunding of bypass trusts and missed tax advantages. (04:10)
  • Quote:

    “You should really do the homework of figuring out what happens upon your client’s deaths now because potentially you still have these inflexible funding formulas.”
    —Anne (04:11)

• Need for Review: Advisors have an extended window to review and modernize client documents, especially in light of rising exemption amounts and possible future increases.

3. Flexibility Outranks Immediate Tax Minimization

• Younger Clients: Emphasis shifts away from immediate estate tax avoidance for younger ultra-high-net-worth clients, given the extreme unpredictability over the next 20-50 years. (06:53, 08:58)
  • Quote:

    “If you’re going to be here for 50 to 60 more years, we’re probably going to see 30 different estate tax numbers over that period of time.”
    —Thomas (08:24)

• Political Football: The estate tax is highly subject to political changes.
  • Quote:

    “You’re seeing how much the estate tax is a political football...such a fiction of legislative desire.”
    —Anne (08:58)

• Key Takeaway: Don’t “shackle” younger clients by locking assets in inflexible or irreversible trusts unless there is an overwhelming current need.

4. Practical Strategies for Flexibility

• Using ILITs (Irrevocable Life Insurance Trusts): These provide liquidity without sacrificing flexibility for ultra-high-net-worth individuals, especially useful when actual estate tax need is uncertain. (10:17)
• Designing Trusts with “Escape Hatches”: If employing irrevocable trusts, ensure provisions for discretionary distributions, decanting, and trust protector powers are included to retain future flexibility. (13:35)
  • Quote:

    “Try to make it have as many escape hatches as possible...what if I need to get the assets out?”
    —Dave (13:36)

5. The Hazards of Irrevocable Trusts and SLAT “Mills”

• SLATs Aren’t for Everyone: Spousal Lifetime Access Trusts (SLATs) are increasingly popular but not always appropriate. Real-life examples showed how unexpected life changes (e.g., divorce) or liquidity needs can turn SLATs into liabilities. (10:56–12:21)
  • Quote:

    “There’s almost like this SLAT mill effect going on...they seem like such a great tool, like everybody should have a SLAT. And that’s not the case.”
    —Anne (12:21)

6. Broader Tax Planning Implications

• Other Tax Provisions Likely to Stay: Income tax reductions or the IRS being abolished are dismissed as highly unlikely. The expectation is continued persistence of current tax brackets, with some speculation about the fate of the standard deduction, SALT caps, and business deductions. (14:42)
  • Quote:

    “All these people are like, well, then let’s do a flat tax. And they don’t realize that that just helps the wealthy.”
    —Thomas (14:54)

• International and Cross-Border Issues: Potential for renewed changes in repatriation and international tax compliance. (16:47)

7. The Core Principle: Plan for Change with Flexibility

• Flexibility Above All: With political tides likely to shift again, making radically irreversible moves is cautioned against. Instead, emphasize plans that can adjust as laws shift.
  • Quote:

    “Flexibility is just so key because...a couple of years, we’re probably going to do one of these episodes and it’s going to go the other way.”
    —Dave (17:17)

• Modern Drafting Techniques: Adopt funding elections such as Clayton QTIPs and limited powers of appointment to keep trust structures nimble. (19:06)

8. Other Estate & Tax Provisions to Watch

• Bonus Depreciation & Opportunity Zones: Expect possible extensions or enhancements, which would have major impact for real estate investors and business owners. (20:34)

Notable Quotes & Memorable Moments

• On Political Flux:

  “You need to have as many, what I would call escape hatches as possible if you’re going to do it.”
  —Dave (13:35)

• Pragmatic Outlook:

  “The right lens is actually flexibility...What is the best thing for your life, then how do we fill in taxes there?”
  —Thomas (10:56)

• Warning for Advisors:

  “Clients don’t always think that [flexibility’s] a good thing, but...work with the attorney to make sure that you understand where you’re building in flexibility into the plan.”
  —Anne (19:06)

Key Timestamps

• 01:05 — Analysis of TCJA sunset expectations and new political reality.
• 04:10 — Why reviewing and updating trust funding formulas is critical now.
• 06:53 — Evaluating urgency: Should younger clients engage in estate tax planning?
• 08:58 — Estate tax as a legislative “political football.”
• 10:17 — Alternative strategies: ILITs and liquidity planning.
• 12:21 — Dangers and difficulties of unwinding irrevocable trusts, overuse of SLATs.
• 13:35 — Building escape hatches and flexibility into irrevocable trusts.
• 14:42 — Likelihood of other tax reforms or continuations.
• 16:47 — Anticipating cross-border tax and compliance changes.
• 17:17 — The only constant in estate planning: flexibility.
• 19:06 — Modern trust drafting for adaptability.

Summary Takeaways for Advisors

• Review client documents now: Many plans may still include outdated structures designed for a lower exemption environment.
• Prioritize flexibility: Only employ irreversible techniques when truly warranted and always with ample “escape hatches.”
• Educate clients: Especially high net worth and younger clients should understand the volatility of estate tax law and avoid over-committing to strategies that could quickly become obsolete.
• Stay informed: Political winds shift frequently; planning is a continuous, adaptive process rather than a one-time fix.

Advisors are reminded: Stay adaptable, build plans that can evolve, and resist pressure for drastic moves—tax laws, like the political landscape, are always in motion.