Year-End Tax Tips for High-Net-Worth Clients

Estate planners and financial advisors have been busy in 2024 helping their high-net-worth (HNW) clients make sense of higher interest rates and upcoming changes to estate tax rules. Not everyone will feel the impact equally. For example, changes in the estate and gift tax exemption that take effect in 2026 will likely impact only those who are planning to make large gifts (in excess of $6 million to $7 million). Meanwhile, some HNW folks – those whose liquid financial assets equal $1 million or more – might want to consider the benefits of a charitable trust in a higher-interest-rate environment. Read on for four tax and estate planning strategies to consider, and to see how the new landscape might affect you.

1. Rising interest rates supercharge charitable trust planning.

Charitable remainder trusts (CRTs) provide a stream of income to the grantor or designated family members for a specific term of years or for the lifetime of one or more specified people. When the trust terminates, the remaining assets are transferred to one or more charitable organizations. The structure allows someone to make contributions to a trust and receive a partial tax deduction, based on the amount of assets that will go to the charitable organization. Often, the grantor receives more income from the assets than if they’d been liquidated in a taxable transaction outside of a CRT.

A CRT can have several planning advantages, it:

• Allows for deferral of capital gain on the sale of low-basis assets
• Provides a reliable income stream to the grantor and family members
• Generates a charitable income tax deduction
• Provides a benefit to charities or a donor-advised fund

Charitable remainder trusts thrive in a high-interest-rate environment, and because rates have been rising, a CRT can be structured to provide a larger charitable deduction and annual payout to the grantor and family members. The interest rate is set at the creation of the trust, so there would be no negative impact if interest rates declined in the future.

2. Estate tax sunset will not preclude smaller gifts.

There is some confusion about the anticipated estate and gift tax exemption change slated for 2026. For 2024, the federal exemption stands at $13.61 million ($27.22 million for couples). Because of a sunset provision in the Tax Cuts and Jobs Act, however, the number rolls back to the previous $5 million cap on January 1, 2026. Adjusted for inflation, the exemption after this change takes effect in 2026 is expected to be around $7 million.

*Estimated

**Flat rate used for illustrative purposes

Anyone contemplating a gift in an amount equal to or less than the post-sunset exemption amount will not be precluded from making that gift in the future, as that amount will still be available for gifting. For those contemplating larger gifts, it certainly makes sense to talk with a financial advisor and consider the tax benefits of today’s historically high exemption.

3. Now is the time for SLATs and intergenerational gifting trusts.

Individuals making large gifts to a spouse, children, or other beneficiaries might not want to make those gifts outright. An outright transfer from one spouse to another will not shield the assets from estate tax at the transferee spouse’s death. An outright transfer to a child would remove the gifted assets and all future appreciation from the donor’s and their spouse’s taxable estate, but does anyone really want to write a multimillion-dollar check to a child? For numerous reasons, the answer is probably no. In addition to any concerns over how the money might be spent, this type of transfer would leave the assets exposed to the child’s creditors, or to a spouse in a divorce, and would also be counted in the child’s taxable estate at their death.

A viable solution in both cases will likely be some type of trust. A spousal lifetime access trust (SLAT) allows one spouse to transfer assets in trust for the benefit of the other spouse (or both spouses can create a SLAT for each other, thus doubling the tax benefit). The transfer qualifies as a taxable gift that will remove the assets from both spouses’ taxable estates, and the beneficiary spouse can use the trust assets for a wide range of common living expenses if necessary. If a gift is made to a child, an irrevocable gifting trust can control the child’s use of the assets, protect them from creditors and divorce, and keep them out of the child’s taxable estate.

4. Estate planning for widowed individuals.

As already noted, making large taxable gifts prior to the estate tax exemption sunset in 2026 should be a top discussion topic right now for individuals and couples who have high exposure to estate tax. In general, taxable gifts are applied against this lifetime exemption amount. Widowed individuals, however, have a unique situation due to portability rules, which allow a widow or widower to use the unused estate tax exemption of their deceased spouse to shelter assets from estate tax at the surviving spouse’s death.

If a spouse passed away in 2011 or later, then it’s very likely the surviving spouse received a deceased spouse unused exemption (DSUE) through a portability election. If that’s the case, then under IRS ordering rules, any taxable gift made by the surviving spouse will be applied against their DSUE before it’s applied against their personal exemption amount. This effectively prevents the surviving spouse from tapping into their current $13.61 million exemption amount, unless they’re able to make a large enough gift that both absorbs the entire DSUE and utilizes a substantial part of their own personal exemption. Unlike the personal exemption amount, a DSUE is not subject to the 2026 sunset. Whatever DSUE an individual currently has, under current law, will be retained even after the personal exemption amount sunsets.

Tax and estate planning is on many people’s minds amid rising interest rates and forthcoming changes to gift and estate tax rules. Unfortunately, high- and ultra-high-net-worth investors will likely feel the most impact. Strategies that take advantage of trusts such as a CRT and SLAT, as well as IRS portability rules, are nuanced planning approaches that can result in tax savings in some situations. If you’re not sure whether the rule changes apply to you, reach out to your financial advisor for a consultation.

Mercer Advisors Inc. is a parent company of Mercer Global Advisors Inc. and is not involved with investment services. Mercer Global Advisors Inc. (“Mercer Advisors”) is registered as an investment advisor with the SEC. The firm only transacts business in states where it is properly registered or is excluded or exempted from registration requirements.

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