By Hugh Roberts, CFP
Partner/Director,
The Rawls Group
I was speaking with a dealer client last week and he said he didn’t have to worry about estate taxes, because Donald Trump was going to be elected and he was going to do away with estate taxes.
“I don’t have to worry about the lifetime exemption being reduced at the end of 2025 because there won’t be any estate taxes!” he said.
I couldn’t help but think back to 2016 when I had a similar conversation with a dealer client on the day President Trump was elected.
It’s worth re-visiting, because, bottomline, when you start expecting Washington to solve your tax problems, you may wait a long time!
The pertinent question then and now is this: if Trump is elected, what’s the effect on your estate taxes? The answer then and now is—probably nothing, unless you plan to die soon! To understand why I make this statement, we need to examine the political climate over the past 40 years.
Congressional History
Remember, the 1980’s had been a Republican era—but Democrats controlled at least one house of Congress during that time. Since then, our country has been on a political roller coaster ride for the last three plus decades!
Starting in 1992, President Bill Clinton led a Democratic sweep of the Congress. In 2000, President George W. Bush lead a Republican sweep followed President Barack Obama sweeping the Democrats back into office in 2008. In 2016, Republicans under President Trump as the GOP maintained both the House and Senate.
The 2020 election resulted in Joe Biden winning the presidency and Dems winning the House, while the Senate was split 50/50. The 2022 election saw the GOP regaining the House but the Senate remaining split.
Bottomline is that despite campaigning to eliminate estate taxes and controlling all three branches of government, President Trump did not repeal the federal estate taxes. The question therefore is, "Why would we expect a different result this time?"
The natural assumption is that if Trump were elected there would be momentum to change/eliminate the federal estate taxes, but if Biden were elected, status quo would remain. Since we have no idea what will happen or who will be elected, let’s have a little fun speculating and assuming (and we all know what happens when you assume—making an ass out of you and me!).
Is a Change Gonna Come in November?
When it comes to the estate tax issue, Republicans claim they are against this tax and Democrats favor it.
However, the largest reduction of estate taxes occurred in 2011 under President Obama, when the estate tax laws were amended to increase the exemption per person to $5,000,000 including an annual escalator of the exemption based on inflation, which has increased the estate tax exemption in 2024 to $13,610,000 per person or over $27M per married couple.
As a result, the estate taxes today are the lowest ever and affect less Americans than ever before, approximately 0.1% of the population. No wonder politically this has been a tough out, since it doesn’t affect most voters. Nevertheless, if your estate will have to pay estate taxes, you’d just as soon not!
“If President Trump is going to eliminate estate taxes, I don’t need to worry about estate taxes!”, exclaimed one of my dealer clients in 2016. “So, you plan on dying in the next eight years?”, I asked. “Because that’s the maximum number of years that President Trump can be in office.” (Little did we know that the number of years might increase to 12).
Anticipating Trump's Agenda
If you expect to live longer, you will have to hope that the Democrats will not get back into office, because they will do the same thing Trump plans to do, only in reverse—bring back estate taxes. This client’s life expectancy is 20 to 25 years meaning he should expect to live through five to six more Presidential elections! How many elections will be held during your lifetime?
President Trump is probably highly motivated to do away with estate taxes and why wouldn’t he, since his estate taxes would be extraordinary—HUUUUGE! I’m sure he would love to join fellow New Yorker billionaire, George Steinbrenner, owner of the Yankees, who died in 2010, during the only year in my lifetime in which there were no estate taxes.
What are the odds on a newly-elected President Trump getting this done? Well, first of all I would not want to bet against President Trump.
Facing a Senate Speed Bump
According to present Senate rules, it takes 60 votes to change the estate tax laws without having to re-vote on the law within 10 years (the so-called Sunset Rule). This is precisely the predicament President George W. Bush faced in 2000 when he sought to eliminate estate taxes. That year he had 58 Republican votes while President Trump had only 52 (stay tuned to the 2024 election results).
President George W. Bush was able to build a consensus to decrease the estate taxes by increasing the exemption, but the 10 year rule meant that the law would be voted on again after he was out of office.
And that is the problem—whether or not you vote for him in 2024, there will be life after President Trump and there will be changes in the estate tax laws!
Estate Planning
So, what should you do if you want your family to win, not the IRS? Plan as if solving this problem depended on you, not Washington!
You’ve never trusted Washington to solve your problems, so why start now? Your tax advisors are skilled at helping you utilize existing tax law to minimize your estate taxes, utilizing proven tax planning. Take advantage of the current tax law to transfer assets to family members using minority discounts (which have been under attack by the IRS). Take advantage of downturns in the market when values are lower to transfer assets.
My partners and I regularly work with our auto dealer clients and their tax advisors to minimize estate taxes. Recently one of our client’s CPA stated, “the transaction we just completed should remove $50M of value from your estate over the balance of your lifetime.” Only time will tell if his projection is accurate, but it reinforces my statement that significant steps can be taken if you want to reduce your estate taxes.
2025 Deadline
The federal lifetime exemption is scheduled to be reduced at the end of 2025 from $13,610,000 per person currently to approximately $7,000,000. If you utilize this exemption to transfer assets to your family and/or to your spouse (via a Spousal Lifetime Access Trust), before 2026, you will be grandfathered and thus will have removed millions from your taxable estate.
But, if you wait until 2025, hoping Washington will act to eliminate the estate tax, you may find yourself unable to take advantage of this tremendous tax saving opportunity.
Why? In 2025 every attorney, CPA, appraiser, not to mention your manufacturer/s expects to be inundated with requests to transfer assets.
You snooze, you may lose! 2024 is the year to take control of your estate tax planning situation and save millions of tax dollars!
A Cautionary Tale
A number of years ago, I met with a dealer client and his deceased father’s original partner, who had brought his father into the car business. The elderly former partner exclaimed, “Your father was an excellent businessman, so I’ve got to believe he had a plan to address his estate taxes—tell me about it.”
The son replied, “No he didn’t, and Hugh and I tried many times to persuade him to deal with it. It was a huge problem and I just got lucky."
"Dad died just as we were coming out of a few lean years, so we were able to get lower valuations and with the increased profitability we were able to borrow a lot of money and sell some key assets. It could easily have gone the other way. Our family could have lost it all! I’m not about to depend on luck to solve this problem for my children and grandchildren. I’ve got a plan!”
Hope Is Not a Strategy
So, what is your plan? Are you wishing and hoping that the estate taxes will go away? Are you trusting that electing President Trump will solve this once and for all? Depending on Washington is ‘wishing and hoping’. Wishing and hoping is not a plan!
If Washington does do away with estate taxes, like the Steinbrenner family – you got lucky! But if you plan, expecting there will be estate taxes, then your family is prepared and protected. That’s not luck and YOUR FAMILY AND BUSINESS WINS!
Hugh Roberts, CFP® is a Partner/Director of The Rawls Group. business succession planning firm. Hugh specializes in issues that car dealers and their families must resolve to preserve assets and develop succession plans geared toward building business value.