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The New York Yankees earned their first victory of the 2024 World Series on Tuesday, October 29, defeating the Los Angeles Dodgers in Game 4. This gave Yankee fans hope, but it was short-lived. The very next day, the Dodgers won Game 5 to become World Champions.
We believe Donald Trump's victory, combined with Republican control of the Senate and, as of this writing, the prospect of a Republican-controlled House, will extend the Tax Cuts and Jobs Act (TCJA) beyond its originally scheduled 2026 sunset. Our focus for this blog post will center on the sunset, its effect on estate taxes, and why you may still need to make your completed gifts before the end of 2025, even if the TCTJ is made “permanent.”
The TCJA 'Twilight' - What an Extended Tax Relief Period Means for Estate Planning
Not much different than the Yankees’ brief moment of hope in the World Series, the TCJA extension for estate taxes under Trump might provide only temporary relief for estate planning. Just as the Dodgers ultimately prevailed, economic realities of mounting deficits would likely triumph over a permanent TCJA.
Increased government spending and the anticipated impact of additional tax cuts and trade policies suggest that estate tax relief might follow the same path as the Yankees' championship dreams. It was only a momentary bright spot followed by a different outcome.
At Dunham Trust Company, we feel that although many describe the proposed Tax Cuts and Jobs Act extension as ”permanent,” fiscal realities suggest a different outcome. We view this extension as an extended twilight, a prolonged period of favorable tax treatment that must eventually reach sunset due to mounting deficits and economic pressures.
Rather than viewing the anticipated TCJA extension as a reason to delay estate tax planning, consider it an opportunity to implement proactive strategies. Favorable conditions may persist in the short term, but estate tax planning remains crucial to secure benefits before potential future policy changes. In both tax policy and estate planning, today’s victory doesn’t validate tomorrow’s success.
IRS Safe Harbor for Gifting Ends in 2025: Why Delaying Estate Planning Could Be Risky
While the IRS offered clear guidance in 2019 protecting gifts made through 2025 under the elevated TCJA exemption from future claw-back, no such assurance exists for gifts made after 2025.
The Treasury Department’s final regulations specifically addressed the protection of gifts made during the TCJA period of 2018 through 2025 but remained silent on the treatment of large gifts made following any future exemption extensions. This regulatory uncertainty, combined with mounting federal deficits and a potential increase in estate taxes, is why we believe in utilizing the current exemption under the established safe harbor of the 2019 regulations.
Unlike gifts completed before 2026, which carry explicit IRS protection, gifts made during any TCJA extension would enter uncharted regulatory territory. Given this uncertainty, financial advisors with wealthy families should strongly consider implementing major gifting strategies while operating under clear IRS guidance, rather than risking an unclear regulatory landscape in the future. (2)
Wealthy families who implement comprehensive estate planning strategies during this twilight period could secure current benefits while protecting against the potential of future tax increases.
Let us look at why we believe this is a prolonged twilight, but that an eventual sunset may be in store regardless of who is in power.
Potential Changes to Estate Taxation - The American Housing and Economic Mobility Act
Vice President Kamala Harris endorsed the American Housing and Economic Mobility Act of 2024, introduced by Representative Emanuel Cleaver and Senator Elizabeth Warren in July 2024. This was to create 3 million new affordable homes. Although it was marketed primarily as affordable housing legislation, the bill proposes substantial changes to estate taxation to fund its initiatives.
Under this proposed legislation, the estate tax exemption would decrease dramatically from its current $13.61 million to $3.5 million, reverting to the 2009 threshold. The bill also outlines a new progressive estate tax rate structure as follows:
- 55% tax rate on estates up to $13 million
- 60% tax rate on estates between $13 million and $93 million
- 65% tax rate on estates above $93 million
- Additional 10% surtax on estates exceeding $1 billion
While this proposal will likely not become law, it highlights the potential vulnerability of estate tax policies as a target for deficit reduction efforts. This was proposed as part of the almost $550 billion funding for affordable housing. (8)
While the results of the 2024 election likely mean that this bill will not see the light of day, it does illustrate how vulnerable estate taxes could be when trying to raise tax revenue to cover deficits. (1)
Why Estate Tax Planning Before 2026 is Essential
The preliminary analysis of the Congressional Budget Office shows the federal deficit reached $1.8 trillion in the fiscal year 2024, ending September 30. This deficit is the third-largest deficit in American history. Only the pandemic-era deficits of 2020 at $3.1 trillion and 2021 at $2.8 trillion exceed this amount(3). When measured as a percentage of GDP, accounting for recent revisions and economic growth, the fiscal year 2024 deficit reached 6.4 percent. This ratio surpasses every deficit since 1930, except during World War II, the 2008 financial crisis, and the recent pandemic. (3)
For 2024, through September 30, the federal government spent $6.75 trillion and collected $4.92 trillion in revenue, resulting in a $1.83 trillion deficit.
Source: FiscalDataTreasury.gov, 2024 (4)
A significant driver of the expanding deficit comes from net interest payments on the public debt, which surged 34% to reach $950 billion in fiscal year 2024. Interest payments now represent the second-largest federal expenditure, surpassed only by Social Security at $1.5 trillion, while exceeding both defense spending at $826 billion and Medicare outlays at $869 billion. (3)
Source: FiscalDataTreasury.gov, 2024 (5)
The relationship between a nation's debt and gross domestic product (GDP) is an important indicator of fiscal health. This debt-to-GDP ratio generally provides a more meaningful assessment of national financial stability than raw debt figures alone.
These interest payments represent approximately 3.3% of GDP, and this ratio stands at the highest since 1992, approaching the peak levels recorded since 1940. As the nation enters the new fiscal year, interest payments as a share of GDP are poised to break historical records, exceeding the previous high point established in the early 1990s. (3)
Source: FiscalDataTreasury.gov, 2024 (5)
What Might The Trump Administration Bring?
Estimates are that Trump’s tax proposals would increase the 10-year budget deficit by $3 trillion. Let us see what the plan entails(6).
But Trump's proposed tax plan includes three significant changes to the U.S. tax code and trade policy. At its core, the plan would make most of the provisions of the Tax Cuts and Jobs Act permanent starting in 2026, with one significant change. The plan anticipates removing the cap on state and local tax (SALT) deductions. These extensions would preserve the current tax rates, brackets, and standard deduction, among other key provisions. (6)
The proposal introduces several new tax exemptions aimed at working Americans. Under the plan, overtime pay, tips, and Social Security benefits would become tax-exempt. Additionally, taxpayers would gain a new itemized deduction for auto loan interest. The proposal also seeks to restore business tax provisions like 100% bonus depreciation and R&D expensing while introducing a 28.5% domestic production activities deduction to effectively lower the corporate tax rate to 15% for domestic production. (6)
Do Tariffs Benefit the U.S. Economy? Examining the Economic Impact of Proposed Tariff Increases
The proposed trade policies include a dramatic increase in tariffs, with Chinese imports facing a 60% rate and all other imports subject to a 20% universal rate.
According to a Tax Foundation economic analysis, such tariff increases may prompt significant retaliatory actions from global trading partners. Economic modeling indicates these trade restrictions could erase more than two-thirds of the projected long-term gains from the proposed tax reductions. (6)
This finding implies tariffs are a particularly inefficient revenue-raising mechanism, as their economic costs extend beyond their direct impact on prices.
Let us look at Trump's last tariffs before COVID. The Trump administration's tariff policies led to significant costs through agricultural subsidies. After China retaliated against U.S. tariffs with its trade restrictions, American agricultural exports to China plummeted from $24 billion in 2014 to $9.1 billion in 2019, with soybean exports declining by 75%(7).
The administration authorized $28 billion in farm subsidies through the Commodity Credit Corporation to offset these losses. This amount is interesting because it exceeded annual budgets for maintaining America's nuclear arsenal, which was $21.8 billion, as well as Navy shipbuilding, which amounted to $22 billion at the time, and several federal agencies, including NASA, which had a $19.8 billion budget, and the State Department, which had a $26.8 billion budget.
These subsidies required no Congressional budget offset and directly increased federal spending, effectively requiring taxpayers to absorb the economic consequences of the administration's trade policies. (7)
Final Thoughts: Plan Your Estate Tax Strategy Before the Sunset
The mounting deficits, soaring interest payments, and tariff implications suggest that this extended twilight of favorable estate tax treatment cannot last forever.
While the IRS offers protection for gifts made through 2025, no such assurance exists beyond that date. Without explicit IRS guidance for post-2025 gifts, even if the TCJA extends beyond the scheduled sunset, wealthy families face uncertainty about utilizing the higher exemption after 2025.
In addition, keep in mind that your clients in high-income tax states could find income tax relief if a completed gift is made in a trust situs with no income tax, like Nevada and Wyoming.
The prudent course is clear. Implement comprehensive estate planning strategies during this twilight period, when regulatory certainty exists, rather than waiting for what may prove to be a darker and more restrictive tax landscape ahead.
Feel free to reach out to the Dunham Business Development Team at (858) 880 – 5778 for more information.
Sources:
- Proposed Estate Tax Changes From Harris Campaign, by Harrison Estate Law, October 14, 2024, https://www.harrisonestatelaw.com/proposed-estate-tax-changes-from-harris-campaign/
- Treasury, IRS: Making large gifts now won’t harm estates after 2025, by the IRS, November 20, 2018, updated September 11, 2024, https://www.irs.gov/newsroom/treasury-irs-making-large-gifts-now-wont-harm-estates-after-2025
- Another Huge Federal Deficit in Fiscal Year 2024 Despite Surging Corporate and Other Tax Collections, by William McBride, October 10. 2024,
https://taxfoundation.org/blog/federal-budget-deficit-tcja-revenue-spending/ - What is the National Deficit, by FiscalData, n/d, https://fiscaldata.treasury.gov/americas-finance-guide/national-deficit/
- What is National Debt, by FiscalData, n/d, https://fiscaldata.treasury.gov/americas-finance-guide/national-debt/
- Donal Trump Tax Plan Ideas: Details and Analysis, by Reica York, Garrett Watson, Alex Durante, and Huaqun Li, October 14, 2024. https://taxfoundation.org/research/all/federal/donald-trump-tax-plan-2024/
- Trump Tariff Aid To Farmers Cost More Than U.S. Nuclear Forces, by Stuart Anderson, February 6, 2020, https://www.forbes.com/sites/stuartanderson/2020/01/21/trump-tariff-aid-to-farmers-cost-more-than-us-nuclear-forces/
- The American Housing and Economic Mobility Act of 2024, Senator Elizabeth Warren & Congressman Emanuel Cleaver, n/d, https://cleaver.house.gov/sites/evo-subsites/cleaver.house.gov/files/evo-media-document/ahem_2024_summary.pdf
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This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation, or as a substitute for legal or tax counsel. Any investment products or services named herein are for illustrative purposes only and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance. All examples are hypothetical and are for illustrative purposes only.
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Dunham & Associates Investment Counsel, Inc. is a Registered Investment Adviser and Broker/Dealer. Member FINRA / SIPC. Advisory services and securities offered through Dunham & Associates Investment Counsel, Inc.
Trust services offered through Dunham Trust Company, an affiliated Nevada Trust Company. Dunham Private Trust is the Wyoming division of Dunham Trust Company.