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What Now? Why the Election Won’t Immediately Change Tax Laws

With the 2024 election over, many people are wondering what will happen next, especially in terms of potential changes to tax laws. Of particular interest is the much-debated sunset of the current estate tax exemption, which is scheduled to expire at the end of 2025 unless Congress intervenes.

For those focused on estate and tax planning, it’s critical to understand why the election results won’t lead to immediate changes—and how to navigate the planning landscape over the next year.

The Long Road from Election Day to Tax Law Changes

A key reason tax laws won’t change immediately is the timeline for Congress to take office and begin the process. The newly elected Congress won’t be sworn in until January 2025, and it’s only after this session begins that Congress will begin its budget reconciliation process, which is required to implement most tax changes. The process itself is layered and time-consuming, generally involving multiple steps before any new tax legislation is passed.

The process kicks off when the President submits a budget proposal to Congress. From there, both chambers of Congress need to pass budget resolutions that include specific reconciliation instructions. Next, committees draft legislation that aligns with budget targets, which is then consolidated by the budget committees into a single omnibus bill. Each chamber then votes on its respective version of this omnibus bill.

All of these steps mean that any changes to estate tax laws will take time to materialize. The future of the estate tax exemption, for example, is still undecided, creating a level of uncertainty for estate planning that will likely persist well into 2025.

Estate Tax Exemption: What’s at Stake?

The estate tax exemption is currently at an all-time high, with each individual allowed an exemption of $13.61 million in 2024. Without new legislation, this exemption is set to drop to approximately $7 million per person on January 1, 2026.

This potential reduction has high-net-worth individuals wondering how to best approach their estate planning: Should they make significant gifts now, taking advantage of the current exemption, or wait and see if Congress intervenes?

Given the large tax implications at stake, a wait-and-see approach might seem appealing, but it can be a risk. Waiting until the last minute to create or adjust a complex estate plan or business succession plan can be challenging. The IRS is known for scrutinizing last-minute actions and may invoke doctrines like the step transaction or reciprocal trust doctrines if it suspects efforts to avoid taxes.

The potential drop in the exemption amount also has significant implications for charitable planning, as gifts to family members, donor-advised funds, and other charitable vehicles may be impacted. If you’re working with clients who have high-net-worth estates, now is the time to evaluate their charitable intentions and discuss various planning options that can address both tax efficiency and philanthropic goals.

What Can You Do Now?

With the sunset looming but uncertain, here are some steps to consider:

• If you’re working with charitably inclined clients who may be impacted by the estate tax exemption sunset, reaching out to the community foundation now can help them explore options that align with both their charitable goals and potential tax implications. A proactive approach gives clients more time to thoughtfully consider their options and execute a plan before any new legislation takes effect.
• Don’t assume clients aren’t charitably inclined just because they haven’t expressed it. Ask them directly, especially now, as charitable giving can be a valuable component in achieving a more favorable tax outcome under shifting laws.
• While the estate tax exemption changes remain uncertain, staying informed will be essential for making timely adjustments as needed. Keep your clients updated on developments so they can make informed decisions based on the most current information.

As we navigate the unfolding tax landscape together, we look forward to working with you to help clients maximize their charitable impact and plan effectively for the future. Feel free to reach out to us with any questions or for further guidance!