Maximize estate planning strategies amid new tax legislation

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Maximize estate planning strategies amid new tax legislation

Vanguard Perspective


October 26, 2023

Estate planning is a crucial component to helping establish a client’s legacy. Not only does it allow clients to safeguard their assets, but it also allows them to support their cherished causes while benefitting their loved ones. Recent tax legislation, including the tax sunset, has brought about significant changes that will affect the future of clients’ estate planning strategies, particularly for higher net worth clients.

As your clients approach tax planning and estate planning decisions, it’s imperative to discuss the implications of current tax laws, potential changes on the horizon, and how you can help them make informed decisions that will impact their financial legacy.

The tax sunset and its implications

In December 2017, the Tax Cuts and Jobs Act (TCJA) lowered individual federal tax rates and raised the lifetime estate and gift tax exemption. However, these changes are only temporary and are set to expire at the end of 2025. Unless new legislation is passed, we can expect several significant changes in 2026:

  • Individual income tax rates:
    Individual income tax rates are scheduled to increase for the majority of taxpayers.
  • Standard deductions and exemptions:
    The standard deduction, itemized deductions, personal exemptions, and child tax credits will revert to pre-TCJA levels.
  • Lifetime estate and gift tax exemption:
    The lifetime estate and gift tax exemption will revert to the pre-TCJA levels, which will be half of what it is today. In 2023, individuals can gift up to $12.92 million tax-free ($25.84 million for married couples), which will be cut to $6.46 million per person if no new legislation is enacted.

Opportunities amidst the tax changes

With the upcoming tax sunset, keep in mind these key considerations when guiding client conversations about their estate planning and gifting strategies:

  • Roth conversions:
    Many clients may face increased tax rate after the sunset, but the amount will vary by the individual and their circumstances. If a client’s tax rate is expected to increase, a Roth conversion may be a good option. Such an approach has the potential to allow converted funds to grow tax-free, which could equate to a larger after-tax inheritance in the future for heirs. Explore the benefits of a Roth conversion with our Roth BETR calculator.
  • Estate and gift tax exemptions:
    Clients can take advantage of current estate and gift tax exemptions to maximize tax-free transfers. Large lifetime gifts made between 2018 and 2025 would not be “clawed back” into the estate upon the donor’s passing simply because they died after the sunset.
  • Annual exclusion gifts:
    Clients can start using a number of evergreen gifting strategies today to transfer assets while reducing their taxable estate. Individuals can make $17,000 annual exclusion gifts to as many people as they wish, and future appreciation on assets will avoid gift and estate taxes.

Charitable giving: Three elements of a successful plan

Learn more about common charitable giving strategies and the advantages and disadvantages of each with examples to illustrate the potential impact.

  • 529 savings plans:
    In 2023, individuals can front-load $17,000 contributions intended to be spread over a five-year period by contributing $85,000 at once, without incurring the gift tax. This provides an excellent opportunity for educational planning, as clients can contribute to a family member or friend’s 529 college savings plan.
  • Maximized gifts to charities:
    Clients can consider making cash contributions to public charities before the deduction cap potentially decreases in 2026. With donor-advised funds (DAFs), clients may receive an immediate tax deduction while allowing grants to be made over time. Direct indexing is another tax-efficient strategy that enables potential tax write-offs for donations. Learn more about tax alpha opportunities with Vanguard Personalized Indexing with our Tax Alpha calculator.

Family gifting strategies and the tax sunset

For more details on the array of strategies for estate planning and gifting, download this client-approved guide.

The decisions your clients make today can significantly impact their taxable estate in the future. As their advisor, you can bring peace of mind by helping them navigate the changes in legislation and determine the best gifting strategy to align with their goals and values.

Other resources for managing clients’ wealth

As clients’ wealth grows, so does the complexity of their financial situations and needs. As an effective wealth manager, you bring to bear the full scope of your advice toolkit, from financial planning and portfolio management to behavioral coaching.

  • Withdrawals from a Roth IRA are tax free if you are over age 59½ and have held the account for at least five years; withdrawals taken prior to age 59½ or five years may be subject to ordinary income tax or a 10% federal penalty tax, or both. (A separate five-year period applies for each conversion and begins on the first day of the year in which the conversion contribution is made).
  • This information is general and educational in nature and should not be considered tax and/or legal advice. Any tax-related information discussed herein is based on tax laws, regulations, judicial opinions and other guidance that are complex and subject to change. Additional tax rules not discussed herein may also be applicable to your situation. Vanguard makes no warranties with regard to such information or the results obtained by its use, and disclaims any liability arising out of your use of, or any tax positions taken in reliance on, such information. We recommend you consult a tax and/or legal advisor about your individual situation.

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