Preparation of the "Sunset" and Estate Planning in an Uncertain Economic Climate for High Net Worth Families

The recent volatility in the stock market, ongoing trade wars, and talks of further increases to the federal debt ceiling have intensified concerns in recent months around economic uncertainty and the risk of a recession. Meanwhile, the U.S. House adopted the U.S. Senate’s budget resolution on April 10th before Congress adjourned until April 28th, thereby setting the stage for the drafting of legislation to pass a budget reconciliation bill. While the timeline to finalize a bill remains uncertain, there are talks that lawmakers hope to finalize a bill by Memorial Day for the President’s signature. What seems clear at this time is that the legislation aims to extend the tax cuts under the Tax Cuts and Jobs Act (the “TCJA”), as well as to include additional tax cuts and raise the debt ceiling even further.

As a reminder, under the TCJA, the amount any U.S. citizen or U.S. domiciled individual can currently transfer to others during lifetime or upon death with respect to their worldwide assets without being subject to the 40% gift and estate tax is $13.99 million (after indexing for inflation for 2025) (commonly referred to as the “gift and estate tax exemption” and for purposes herein, the “Exemption”). The TCJA further provides that effective January 1, 2026, the Exemption “sunsets” and reverts automatically to $5 million (which is projected to be approximately $7 million in 2026, after indexing for inflation). Assuming the tax cuts under the TCJA are extended under a budget reconciliation bill this year, it is very likely, though not certain, that the current Exemption will be extended for a term of years or possibly made permanent. The fate of the Exemption ultimately depends on its priority level during the negotiation process, as the current administration continues to implement its agenda.

Despite the possibility that the current Exemption could be extended under a budget reconciliation bill this year, the message to high net worth families continues to be that they consider implementing gift and estate tax planning before the end of 2025. For individuals whose worldwide wealth far exceeds the current $13.99 million Exemption there is no reason not to plan. For individuals whose wealth exceeds $7 million, but not $14 million, potential gift and estate tax planning strategies should still be considered given the Exemption could revert to approximately $7 million at the end of 2025. For individuals who are concerned with buyer’s remorse, by proceeding with making an irrevocable gift today, even if the currently higher Exemption is extended beyond 2025, there are planning strategies that can be utilized that address such concerns.

For several reasons, the time to act is now. A primary reason to act now is that implementation of gift and estate tax planning strategies cannot be fully executed overnight. Time will be necessary to consider the proper gifting strategy and the proper assets to gift, and then to prepare the relevant documents to effectuate the plan. These steps require discussion with not only an individual’s estate planning advisor, but also with the individual’s other advisors, such as their financial advisor, to determine how much wealth can be reasonably transferred versus how much wealth an individual needs to keep to comfortably live the balance of their lifetime. As time draws nearer to the end of 2025, estate planning professionals may be inundated with requests for planning, and this could jeopardize the ability to timely prepare and implement the plan before the clock runs out.

Another key reason for individuals to act now is tied to the current economic climate. As of May 6, 2025, the S&P 500 had declined year-to-date by approximately 4.7%, which equates to a market cap loss of approximately $3.3 trillion. This downturn arguably reflects investor concerns over economic and political instability, including uncertainties stemming from recent tariff implementations and fluctuating corporate earnings forecasts. Moreover, while markets have declined in value, volatility has increased,  which undoubtedly creates economic uncertainty; however, it can also result in decreased asset values. While it is hard to imagine there could be anything advantageous about today's uncertainties and potentially depressed asset values, the following points demonstrate why these factors make it an opportune time to transfer wealth. 

Depressed asset values provide the opportunity to transfer more wealth out of one’s taxable estate. Moreover, market uncertainties result in increased opportunities to take greater discounts on asset valuations for gift and estate tax planning purposes. Taking advantage of such discounted values now will allow for even greater shifting of value out of one’s taxable estate, which can be done, for example, using estate tax protected trusts that benefit children and further descendants for generations to come. History shows us that economies rebound, and those who plan while asset values are depressed have the opportunity to shift post-market downturn growth in asset values out of their taxable estate.

Example: Assume an individual owns an asset (for instance, a retail shopping center) that was initially worth $10 million in Year 1 (before any market downturn). The individual wishes to transfer such asset for the benefit of the individual’s children. In Year 2, assume that, as a result of an economic downturn, the individual obtains a fair market value appraisal that values the asset at $7 million, along with a further discount of 30%. This creates an opportunity to transfer a $10 million asset, at a $4.9 million gift tax value, in Year 2. Assume the market rebounds in Year 3 and the fair market value of such asset is restored to $10 million. By gifting the asset in Year 2, the individual is able to shift not only the asset outside of their taxable estate, but also the $3 million of appreciation that occurred in Year 3 (as well as any future additional appreciation that occurs after Year 3). By shifting $10 million of value outside of the taxable estate, the individual is potentially saving approximately $4 million of estate tax liability compared to doing no planning.

In addition to potentially depressed asset values and the ability to possibly obtain significant valuation discounts, another significant factor is interest rates. Although we are all waiting to see what action is taken by the Federal Reserve this year, many experts expect that interest rates will remain elevated in 2025 with no significant cuts. While higher interest rates make certain gift and estate tax planning strategies less attractive, it is very important to note that other planning strategies become even more advantageous during periods with elevated interest rates. A few of those examples are as follows:

- Qualified Personal Residence Trusts. You could utilize a portion of your Exemption to fund a Qualified Personal Residence Trust (a “QPRT”) with a primary or secondary residence. You would transfer the residence to the QPRT and retain the right to live in the residence for a term of years (the "QPRT Term"). After the term of years the personal residence passes to the remainder beneficiaries, such as your children, as set forth in the Trust Agreement. If, however, you pass away during the QPRT Term, the transferred property is clawed back into your taxable estate.

This retained right to continue using the property results in a discount on the gift to the QPRT for the future beneficiaries. QPRTs are an attractive planning strategy while interest rates are high because of how the taxable gift of the residence to the QPRT is computed under the applicable tax law rules. In essence, a higher interest rate environment makes the value of the taxable gift lower, thereby requiring less use of your available Exemption to fully shield the transfer from gift tax. This in turn allows for the conservation of Exemption, which can then be applied towards other gifts, thereby allowing an individual to gift more out of their taxable estate, especially if you are trying to take advantage of the currently higher Exemption before the end of 2025.

If you survive the QPRT Term, then the residence remains in the QPRT and passes outside of your taxable estate. With proper planning you could continue to reside in the residence by paying fair market value rent to the QPRT. If the QPRT qualifies as a “grantor trust” for income tax purposes, then it is possible that during your lifetime the rental income will not be subject to income tax because you, as the settlor of the QPRT, would be treated as the taxable owner of such rental income.

Example: If, today, a 60-year-old individual were to gift a residence with a fair market value of $7 million to a QPRT with a QPRT Term of 15 years, then the value of the taxable gift would be approximately $2.6 million. In this example, assuming 5% annual growth in the value of the residence, at the end of the QPRT Term the residence would have a fair market value of approximately $14.5 million. Assuming the taxpayer survives the QPRT Term the estate tax savings would be a minimum of approximately $4.7 million.

- Charitable Remainder Trust. You also could transfer assets to a Charitable Remainder Trust (a “CRT”) which provides a stream of income payments, at least annually, to one or more individual beneficiaries for life or for a term of years, with a remainder interest to be held for the benefit of, or paid over to, charity. You are entitled to an upfront income and gift tax deduction equal to the present value of the remainder interest ultimately passing to charity. The income tax deduction could be limited based on an individual’s adjusted gross income. Similarly, based on the applicable tax laws for computing the taxable gift, the higher the interest rates at the time of funding the CRT, the greater the value of the charitable remainder interest and, therefore, the greater the charitable deduction available to you. For this reason, CRTs are an attractive planning technique in higher interest rate environments.

Example: Assume, today, a 60-year-old individual were to gift assets with a fair market value of $7 million to a Charitable Remainder Annuity Trust (a “CRAT”) with an initial term of 15 years (the “CRAT Term”). Assume the individual is the sole beneficiary during the CRAT Term (the “present interest”) and, upon the expiration of the CRAT Term, the balance of the trust assets will pass to charity (the “remainder interest”). The individual would be entitled to an income tax deduction for the 2025 tax year of up to $1.9 million. During the CRAT Term an annual annuity of $490,000 (totaling $7.3 million over the entire CRAT Term) would be payable to the individual. Moreover, the initial transfer of $7 million of assets to the CRAT should not be subject to gift tax under the applicable tax law rules. This is because the individual retains the sole right to the stream of annuity payments (the present interest), and the remainder interest will ultimately pass to charity.

Conclusion. Uncertainty in the market can certainly stoke fears about preservation of one’s wealth and cause one to hesitate with respect to gift and estate tax planning. During these critical times we recommend, in addition to speaking with your financial advisor on hedging against loss in the market, that you review your existing estate plan and consider whether there are gift and estate tax planning that you can implement to take advantage of current market conditions. As illustrated above, there are certain gift and estate tax planning strategies that can be implemented before the Exemption is scheduled to sunset at the end of 2025 and provide significant tax savings. Our Firm is available to discuss these strategies and your overall estate planning questions as it relates to the sunset of the Exemption.

[1] For instance, the S&P 500 dropped by 12.1% from January 15, 2025 to April 8, 2025.  Thereafter, the S&P 500 increased by 9.52% from April 8, 2025 to April 9, 2025.

[1] Consideration of this strategy is subject to certain non-tax related issues which should be addressed with your estate planning professional.