Kids benefit from wealth transfers sparked by Harris' poll surge

• Under current law, individuals can transfer up to $13.61 million (and couples can send up to $27.22 million) to family members or beneficiaries without incurring estate or gift taxes.
• But that benefit is set to expire at the end of 2025.
• The trillions of dollars set to pass from older to younger generations in the coming years are being considered by ultra-wealthy investors.

The original article was published in CNBC's Inside Wealth newsletter with Robert Frank, providing a weekly guide for high-net-worth investors and consumers. To receive future editions, subscribe and have them delivered directly to your email inbox.

The tightening presidential race has triggered tax planning by wealthy investors, particularly due to concerns about a higher estate tax, as advised by tax professionals.

The impending "sunset" of a sizable provision in the estate tax next year has gained new importance as the likelihood of a divided government or Democratic president has risen, according to tax experts. Under current law, individuals can transfer up to $13.61 million (and couples can transfer up to $27.22 million) to family members or beneficiaries without incurring estate or gift taxes.

The estate and gift tax exemption will decrease by half if the benefit of the 2017 Tax Cuts and Jobs Act expires at the end of 2025. Individuals will only be able to gift between $6 million to $7 million, and that rises to $12 million to $14 million for couples. Any assets transferred above these amounts will be subject to the 40% transfer tax.

Many wealthy Americans are adopting a wait-and-see approach due to predictions from wealth advisors and tax attorneys that a Republican sweep in the first half of the year may lead to the extension of former President Donald Trump's 2017 tax cuts for individuals.

Vice President Harris has supported increasing taxes for individuals earning over $400,000.

The likelihood of the estate tax benefits expiring has risen due to the close tie between Harris and Trump in the polls, resulting in either gridlock or tax increases.

"Pam Lucina, chief fiduciary officer for Northern Trust and head of its trust and advisory practice, stated that there is a slight increase in urgency now, as some individuals have been delaying their actions until this point."

The sunset of the exemption and the wealthy's response will have significant ripple effects on inheritances and the trillions of dollars set to pass from older to younger generations in the coming years. In the coming decades, more than $84 trillion is expected to be transferred to younger generations, and the estate tax "cliff" is set to accelerate many of those gifts this year and next.

Wealthy families face a dilemma: to give or not to give in advance of any estate tax changes. If they do nothing, they risk owing taxes on estates over $14 million if they die. However, if they give away the maximum now, and the estate tax provisions are extended, they may regret their decision later.

"Lucina stated, "We want to ensure clients consider different scenarios with givers' remorse. Will a lifestyle change be necessary? Can they afford an irrevocable gift?""

Family dynamics and personalities should be taken into account when making gift decisions, in addition to tax considerations. While it may seem beneficial to give the maximum of $27.22 million from a tax standpoint, it may not always align with family needs.

"Mark Parthemer, chief wealth strategist and regional director of Florida for Glenmede, stated that the first step is to distinguish between those who were going to give a gift regardless and those who are only motivated by the sunset. While the exemption may be a unique opportunity, it's not the only thing. The goal is to provide individuals with peace of mind, regardless of the outcome."

Today's wealthy parents and grandparents must ensure they are emotionally prepared to give significant gifts.

""As people age, they often become more concerned about their financial independence, even if the math indicates they are financially independent," Parthemer said."

Some wealthy families who planned to make big gifts in the future are feeling pressure from the tax change to go ahead with it now, as they may fear their kids aren't ready for such large amounts.

Ann Bjerke, head of the advanced planning group at UBS, stated that families with younger children often have donors' remorse as a primary concern.

Families can structure their gifts in a flexible manner, such as gifting to a spouse first and then to the kids, or by establishing trusts that gradually release funds over time to minimize the risk of "sudden wealth syndrome" for children.

For families who intend to utilize the estate tax window, it is crucial to act now as it may take several months to draft and file transfers. The rush to process gifts and establish trusts during a similar tax cliff in 2010 overwhelmed attorneys, leaving many clients stranded. Advisors warn that the same risk awaits today's gifters if they delay until after the election.

Some attorneys are starting to reject new clients, Lucina stated.

Rushing can lead to issues with the IRS, as seen in a recent case where a couple used their exemptions to gift money to their children and wife, resulting in the IRS unwinding the strategy.

"The wealthy spouse was credited with both gifts, resulting in a gift tax," he stated. "It's important to double-check before making a decision, as the saying goes."

The estate tax sunset is the most pressing and likely change that wealthy clients are inquiring about from advisors and tax attorneys, along with other tax proposals in the campaign, such as higher capital gains and corporate taxes and taxing unrealized gains.

"Bjerke stated that in the past month, there has been an increase in inquiries regarding the [estate exemption]. He explained that many individuals were hesitant to take action with their wealth-planning strategies, but now more people are taking action."