Don’t let political drama sidetrack your planning

In talking to clients in the aftermath of the 2024 election, we heard a theme that surprised us: some clients want to take a pause — a planning “time out” — to let the political situation settle over the next year.

We are not sure this is a wise approach and will explain why. Even in the face of political uncertainty, we have been encouraging advisors to make decisions based on current tax and policy conditions and on each client’s financial situation. Now that a Republican sweep of the White House and both houses of Congress has reduced some of the political uncertainty, our guidance still holds: continue to base planning decisions on current tax policy and each client’s current situation. Plan for what we know.

What’s changed: GOP will make extending 2017 tax act a priority

That said, we believe the election has changed the outlook for the biggest policy item we’ve been tracking: the 2017 Tax Cuts and Jobs Act (“TCJA”), a landmark tax bill that lowered income tax rates, capped deductions for state and local taxes and roughly doubled the estate and gift tax exemption.   Many provisions of TCJA are set to sunset at the end of 2025, but the incoming Trump administration has made an extension of TCJA a high priority. Given the Trump administration’s appetite to enact sweeping and long-lasting tax legislation, a brief, temporary extension of TCJA appears less likely than was the case before the election.

The Trump administration and the Republican majority will likely try to protect and extend the gift and estate tax exemption as well as the income tax rates contained in TCJA. The outlook for other relevant aspects of TCJA, including the $10,000 limit on the deduction for state and local taxes (commonly referred to as the “SALT deduction”) is less clear given the mounting fiscal deficit pressures. It’s worth noting that raising the SALT deduction would not only be costly, but it would disproportionately benefit high-income taxpayers in states such as California and New York, which are hardly Trump strongholds.

Before the future of TCJA is considered, we caution advisors to prepare for extended drama over other fiscal issues.  Bills to avoid a government shut-down and raise the debt ceiling are always contentious and full of brinkmanship, and the slim Republican majority in the House makes it likely that these must-pass measures will become early tests of Republican unity.

No time for a time-out: Keep planning

It’s a natural human instinct to take a pause after a momentous event, to let the situation settle. But when we hear about clients who want to take a “wait and see” attitude towards planning on the eve of a second Trump administration, our advice is to stay the course and keep planning.

For example, some taxpayers may be tempted to wait and see with respect to federal income tax planning, deferring income to the future in the hope that income taxes may be reduced. But there is no guarantee of lower income taxes in the future, and in any event, we remind advisors of our overall recommended approach to planning: plan for what we have now, rather than waiting and speculating about what might come next.

Similarly, estate and gift tax exemptions are at historically generous levels. While those elevated exemptions may be extended beyond 2025, if it makes sense for your clients to take advantage of those exemptions now and move assets out of their estate, there’s no reason to wait for Washington’s next move. Remind your clients — not only are they taking advantage of an exemption and removing assets from their potential taxable estate, they are also removing the future appreciation on those assets from their estate.  Put another way, most wealth planning strategies that made sense before the election still make sense now.

As high net worth families look to make large gifts to trusts to take advantage of the current gift and estate tax exemption, we are noticing particular interest among advisors and clients in SLATs — spousal lifetime access trusts. These trusts can offer flexibility in planning by allowing spousal access to the assets gifted to the SLAT while removing the assets from a client’s taxable estate.

Don’t forget year-end tax and wealth planning

Yes, 2024 has been a year for the record books — unusual, unprecedented, unforgettable … choose your favorite adjective.  However, for advisors and their clients, that doesn’t change the need for thoughtful, disciplined year-end tax and wealth planning.

Make sure your year-end conversations with clients are grounded in the moment. This is your chance to take stock and provide calm guidance. Among topics to cover:

• Required minimum distributions from retirement plans for clients 73 years old and older.
• Tax loss harvesting to offset investment gains, a particularly relevant topic after gains in the stock market.
• If you haven’t rebalanced a portfolio, the end of the year could present the opportunity to move assets into more tax efficient vehicles. Your clients will begin 2025 with a more tax efficient portfolio.
• Have your clients made the annual gifts they planned to make to charities and loved ones?
• When was the last time your client updated the elements of their basic estate plan? If you haven’t had a recent conversation to make sure estate plans are updated, the final weeks of the year are a good time to do so. It’s a good time, for example, to make sure beneficiary designations are updated. It’s also a good time to make sure plans have been updated to include new children or grandchildren. Yes, it’s a busy time of year, but it can also be a time to deepen your relationships with clients.

Capital Group has been keeping a close eye on Washington as a crucial part of our investment research and analysis as long as we have been investing and serving clients. We expect 2025 to be another eventful year, and we will continue to cut through the noise to closely monitor tax and economic policy changes. We’ll continue to provide our best guidance on these issues — to help you better serve your clients, and most importantly, to help your clients achieve their financial goals.