Don’t Wait For The Sunset

The November election will impact whether the 2017 Tax Cuts and Jobs Act expires as scheduled, but the time to act is now.

Ultra-high-net-worth individuals (UHNWIs) are anticipating the sunset of the 2017 Tax Cuts and Jobs Act (TCJA), which is set to expire at the end of next year. The TCJA was enacted to address both individual and corporate taxes. The corporate tax cuts and changes were made “permanent,” while the individual tax changes were approved through a congressional process known as reconciliation, requiring an eight-year sunset.

The scheduled expiration of the TCJA’s tax provisions would significantly influence tax and estate planning decisions for UHNWIs. The planned increase in the highest individual income tax rate, for example, would impact cash flow, tax strategies and many other aspects of a UHNWI’s finances, while changes in exemptions would significantly affect estate planning.

We work with several families that view the upcoming tax uncertainty as a catalyst to create and implement important multigenerational plans. The unpredictability of future changes makes it essential to plan ahead and consider the legacy and values of the family that transcend one single generation. This is a critical time to make important decisions that will last for decades and compound over time.

Overview of the 2017 TCJA

The 2017 TCJA brought significant changes to the tax landscape, reducing income tax rates for individuals and corporations. The top income tax rate was lowered from 39.6% to 37%. The lifetime unified estate and gift tax exemption increased to $13.61 million (as of 2024), meaning a married couple could have an exemption of up to $27.22 million.

The TCJA significantly reshaped the U.S. tax landscape for pass-through entities as well. It accelerated depreciation for business equipment, modified the Alternative Minimum Tax and introduced a deduction for pass-through entities.

A cornerstone of the TCJA was the Qualified Business Income (QBI) deduction, offering a 20% deduction on business income from pass-through entities. This provision aimed to level the playing field between C corporations and pass-through entities. Prior to the TCJA, C corporations faced a higher combined tax rate due to corporate and dividend taxes, making pass-through entities like LLCs more attractive for small business owners.

The TCJA’s corporate tax rate reduction made C corporations more competitive. However, the QBI deduction often tipped the scales in favor of pass-through entities, resulting in lower effective tax rates. While the TCJA narrowed the tax gap between C corporations and pass-through entities, it did not entirely eliminate it. Factors such as business size, industry, and individual circumstances continue to influence the optimal entity choice. Potential individual tax rate changes may cause small business owners to reconsider their corporate structure once again.

What’s Next?

While the corporate tax rate of 21% will continue beyond the expiration date for the personal tax policy, the highest individual income tax rate will revert back to 39.6% after 2025 – the “Great Tax Sunset.

The TCJA’s roughly doubled unified estate and gift tax exemption amount will return to the pre-TCJA level as of Jan. 1, 2026, which, indexed for inflation, is expected to be approximately $7 million. Post-TCJA, a married couple’s lifetime exemption will drop to around $14 million, with the estate amount over the exemption subject to a 40% federal estate tax. Starting in 2026, the $10,000 itemized deduction cap for state and local taxes (SALT) will also expire.

The Reality of the Situation

If you’re an UHNWI, you may be asking what the likelihood is of the government actually sunsetting the TCJA, and whether the November election will have any effect on that decision. We don’t and won’t know those answers for certain for a number of months. What we do know is that The University of Pennsylvania Budget Model projects the budgetary impact of extending the TCJA policy to be $4 trillion over the next decade – presenting a challenge for any divided government. That said, both political parties want to extend some of the policies, including the higher standard deduction and tax breaks for those making less than $400,000 per year.

While the election outcome will materially impact the probability of the tax law extension, those who would act in the event of a tax law change should prepare well ahead of time. Don’t wait for the election outcome to start thinking seriously about important family and legacy decisions.

How UHNW Families Should Prepare

UHNW families will require more proactive and forward-thinking advice from their tax advisors. Keeping abreast of legislative changes and planning ahead will be critical to minimize tax implications and build flexibility into financial and business plans. Developing long-term plans that account for the possibility of further changes in tax laws beyond 2025 and emphasizing sustainability and resilience in tax strategies will also help weather future legislative shifts.

Considering a transition between different business structures, restructuring ownership and management of family businesses, and exploring options like trusts, charitable donations and lifetime gifting to reduce taxable estates are all tools on the table. Every family requires a uniquely tailored strategy.

 

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Written by Caleb Silsby, Executive Vice President of Whittier Trust and the Chief Portfolio Manager at Whittier Trust since 2006. Caleb is based out of the Newport Beach office and oversees the investment team for multiple Whittier Trust offices.

Featured in the Family Business Magazine. For more information, start a conversation with a Whittier Trust advisor today by visiting our contact page.

 

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