Q&A . . . With Matt Mentzer

Q: Beyond the increases (about 5.5 percent each) on the Estate Tax Basic Exclusion and Annual Exclusion for Gifts, are there other significant changes in tax matters of note for estate-planning purposes?
A: Nothing that I would call incredibly significant; probably the biggest change is with the part of the Secure 2.0 act, passed in 2022, but with some provisions that become applicable in 2024. The biggest is the ability for those with 529 plans, where the beneficiary of those plans can convert a portion of those funds to a Roth IRA. We have clients who will set up a 529 for educational purposes for their kids or grandkids, and perhaps it’s been overfunded or performed extremely well, and there’s no additional need. That conversion will allow a beneficiary to essentially start their own retirement planning at a fairly young age by converting it to a Roth.  That will become effective in 2024. It may not be huge or significant from an estate-planning perspective, but with some clients, we’ll ask if you’ve ever funded a 529, and this might be a benefit worth considering.  

Q: The jumps in exclusions we noted earlier seem pretty substantial this year. Are those in line with past years?
A: They are a little larger than normal. The reason for that is that the law provides that the annual exclusion and the estate-tax exemption be indexed for inflation, so in the high inflationary period of the past year, those amounts reflect that. 

Q: With the gift exemption, in particular, can you address the impact of the anticipated 2025 sunsetting of that 2017 increase if Congress doesn’t extend it? 
A: We advise people to plan for the law as currently written. Everyone has about a $13.6 million exemption in 2024 or about $27 million for married couples. That will go away in 2026 unless Congress passes a new law. For individuals in the in-between stage, or about $14-15 million if they’re married, they could end up over the exemption, so they should consider gifts in 2024-25 to lock in the use of that lifetime exemption. The law that exists provides for this cliff in 2026; if individuals may be subject to the estate tax after that, they should do estate planning before it sunsets.

Q: That should inspire quite a few folks to act, shouldn’t it?
A: There was a little bit of a scramble in 2022 because the Biden administration had proposed a tax on various items it would have liked to see changed in Congress. There was some concern that, for example, the step-up for income-tax purposes would go away or be modified in some manner based on the level of assets an individual had. There’s always a chance tax laws could change in any particular year, though I would say it’s pretty rare to see that in an election year. The political parties don’t want to give the other side more ammunition than they already have. So, it’s rare to see earth-shattering legislation passed in an election year. 

Q: Speaking of a looming presidential election year, has electoral history taught us anything about what to expect that can impact estate plans?
A: It’s hard to get the crystal ball out on this one. Really, until the past 20 years or so, the estate tax was not necessarily a political hot-button item. With the death and estate tax and general attitudes toward income inequality and how people perceive the wealthy, the estate tax is now more of that hot button. For example, back in 2000, the lifetime exemption was about $675,000—it was very low, so it affected a lot of families. There were exceptions and exclusions for farms and family businesses, but in 2001, the Bush tax cuts also came with a sunsetting provision. 

Q: So, the exemptions have risen and fallen based on political winds at the time. What does that tell you about the current dynamic?
A: Regardless of which party is in office, nobody wants to be seen as hitting the middle class with a transfer, wealth, or estate tax. In the history of the estate tax, the exemption has never been reduced; it’s always stayed where it has been. That said, a jump from $5 million to $13 million, it’s never doubled in that time period, other than with the Trump tax cuts and Jobs Act. In today’s political climate, will Congress just fail to act and let that drop from $13 million to $7 million? That’s a real possibility, but we hope there’s enough runway between now and the election and 2025 to see where Congress is going to act, see what the administration will do, and devise estate plans accordingly. Although I do expect 2025 to be an incredibly busy year in the estate planning world. 

Q: Is that a concern for many folks?
A: Politically, the estate tax doesn’t move the needle on tax revenue; it’s only about 1 percent of revenue per year, and only about 5,000 individuals are affected. In reality, very few people should be worried. Only the incredibly wealthy, but again, it’s a hot button because it allows the parties to mark their territory or make a line in the sand on government overreach, even if the reality is it doesn’t affect most people. 

Q: Have the uneven economy and investment climate complicated planning efforts?
A: Absolutely, and in a couple of different ways. One, when you look at increasing interest rates, that gives some opportunities on the planning side for individuals with higher net worth. If you want, for example, a charitable remainder trust, that and other techniques allow individuals to defer or protect appreciation of assets. When rates increase, that means the remainder amount increases as well. There are still opportunities in the estate-planning world, even with an increasing-rate environment, for individuals not at the ultra-high net worth level. With the inflationary aspect, people start thinking, “Should I make that gift now or wait until I die?” If health care and long-term care costs increase 10 percent year over year, will I have enough to live on for the rest of my life? For the individual, inflation may eat up what they intend to live on, and they maybe can’t make that big gift because they’re concerned about running out. 

Q: What makes estate planning today more complex a chore than it might have been 10 or 20 years ago?
A: To reiterate, there’s not a lot of certainty anybody has because of Congress. In addition to that, some of the largest factors are the way families are comprised now. You find that people are not getting married as often but have long-term domestic partners, live-in boyfriends, or girlfriends who, for all intents and purposes, are in a relationship akin to a marriage. But the tax code and estate planning give a high degree of deference to married couples that you just don’t have with non-married couples. We’re seeing more blended families, people with second marriages, and children from a prior relationship. It’s not the norm, but we see more of that than we did 25 years ago. 

Q: What issues are you encountering with the scope of the generational wealth transfer from Baby Boomers to Gen X and Millennials? Does the scale of that, in the trillions, alter planning functions?
A: Yes, it does, because the largest asset most people will own is their retirement plan, 401k, or IRA. Those come with tax detriments if not left to a spouse. If they’re left to a child, they have to pay income tax on those items. More and more the rise of wealth within retirement assets leads to more complexity with the estate plan because of the limitation of what you can do with regard to distributions.   

Q: Other fallout from that?
A: The other issue I see, because we’ve seen just the tip of the iceberg, is that I think there is going to be a shortage of attorneys able to handle the oncoming estate administration and trust administration after the Boomers start to die off. There’s a real concern: Do individuals and families have the ability to find a competent attorney to help with the administration of their parent’s estate? For individuals at large, that could become a real challenge. The same with health care and the shortage of doctors and nurses.  

Q: How else do generational dynamics shape the field?
A: Because the Boomers are living longer, we see a lot of fiduciaries, children of Baby Boomers, who are receiving a big inheritance but don’t have much financial acumen to understand what is a stock or bond or why this is in a 401(k). There’s an overall inexperience younger generations have with a variety of financial products. Educating the next generation makes estate planning more complex. It’s something they have to learn. 

Q: What have you witnessed, across your career, in the way of changes regarding the way families approach discussions about estate-plan structuring with subsequent generations? 
A: That really depends on the individual circumstances. Suppose Grandpa and Grandma own the family business, and the family wants to keep it in the family, have a son take over as president or CEO, or otherwise transition that to the next generation. In that case, you absolutely have to have conversations at several levels because people’s livelihoods are at stake. Same with the family farm; if you’ve been farming for five generations and want to pass that down, maybe all those in the next generations are in Kansas City and don’t want to return to the farm. The family has to have that conversation about what the transition looks like. But otherwise, in today’s environment, most individuals keep their plans private for several reasons.   

Q: Do younger generations approach the process the way they older ones used  to?
A: Because individuals are living longer, we do see where Mom or Dad may be on their deathbed or have a few months to live, and the children get very active. Is Mom taken care of? Are Dad’s documents in place, and what do they say? If Mom or Dad is relying on the kids as care-givers, are they going to be more deferential to those children so they continue to be taken care of? We see that in more kids than we’d like to, and it’s tough. Those conversations haven’t been had before, and now the kids are pressing. As attorneys, we have to represent our clients, but the reality of family is that people want to know.