The Importance of Adapting Financial and Estate Plans to Legal Changes

When the foundation of a structure becomes unstable, everything built on top must adjust or risk collapse. This principle is not only true in construction but also in financial and estate planning.

In the United States, financial and estate planning is deeply intertwined with legal and tax codes, which form the foundation for achieving our financial goals and life aspirations. Over the past 40 years, we’ve seen continuous shifts in tax, retirement, and economic laws, with minor adjustments happening annually and more dramatic changes occurring roughly every decade. One of those dramatic shifts looms on the horizon, as most personal tax provisions of the Tax Cuts and Jobs Act (TCJA) are set to expire at the end of 2025.

While a full repeal or complete sunset of TCJA is unlikely, change is inevitable. We may see an extension of current laws, a new bill entirely, or a partial rollback to pre-2017 rules. Regardless of the outcome, financial and estate planners must be ready to implement new strategies to adapt to these changes.

Here are three potential shifts and strategies to consider as we approach this period of uncertainty.

1) Higher Personal Income Taxes

If the TCJA expires or is rolled back, individuals may face higher personal income taxes. This potential change could lead to various income-shifting techniques aimed at minimizing tax burdens.

One strategy to consider is using non-qualified deferred compensation plans, which allow individuals to defer income until later when they might be in a lower tax bracket. Additionally, retirement plans like 401(k)s could become even more crucial for tax deferral, allowing for the reduction of taxable income during high-tax periods.

Gifting income-producing property to heirs is another approach worth considering. Families can effectively reduce their overall tax burden by transferring assets that generate income to heirs who may be in lower tax brackets. Charitable giving can also provide significant tax relief. Under the current TCJA laws, many individuals utilize a “bunching” strategy, concentrating charitable donations in specific years to maximize tax benefits. However, spreading out charitable donations over multiple years might become a more effective strategy if tax rates rise.

2) Increased Estate Taxes

One of the most significant potential changes would be the reduction of the lifetime estate tax exemption, which would be cut in half if the TCJA is rolled back. This reduction could expose many more estates to the 40% estate tax, making proactive estate planning essential.

Individuals and families should consider more in-depth conversations with estate planning professionals to mitigate this risk and make greater use of irrevocable trusts. These legal structures can protect assets from estate taxes and ensure a smooth transfer of wealth to future generations. As estate taxes increase, the urgency for such planning becomes more critical.

Additionally, gifting strategies, where assets are transferred to heirs during an individual’s lifetime rather than through their estate, may become more popular. By taking advantage of current high exemption amounts, families can reduce the size of their taxable estate before new laws take effect.

3) Business Owner Tax Benefits

Business owners have enjoyed several beneficial provisions under the TCJA, including the 199A deduction, which allows for a deduction of up to 20% of qualified business income. However, if this benefit rolls back, business owners may face higher tax burdens and potential cash flow issues.

In response, business owners will need to reassess their financial strategies by adjusting expenses, seeking out other available deductions, and reassessing their use of debt to finance growth. Proper financial planning for business owners will be essential to navigating these potential changes while maintaining profitability.

Though the future of tax and financial laws remains uncertain, change is coming. With the upcoming expiration of many TCJA provisions in 2025 and the political landscape yet to fully solidify, now is the time to begin proactive planning. Whether through income shifting, estate planning, or business financial strategies, individuals, and business owners must prepare for new tax realities.

Start by consulting with estate and trust professionals, tax advisors, and financial planners to ensure that your financial and estate plans are adaptable and ready for the changes ahead. Staying ahead of the curve will ensure you’re not caught off guard and have the flexibility to adjust as needed. Being proactive is the best strategy to secure your financial future in uncertain times.