The Moves Wealthy Families Are Making to Skirt Estate Taxes
How dynasty trusts can shield wealth before the Trump tax cuts expire
They gave away $182.6 billion in 2021, more than double the $75.2 billion the year before, according to recently published Internal Revenue Service statistics. Almost $100 billion of those gifts were made via trusts, some of which can last for generations. Another $14.8 billion went to charity.
F or American families with a net worth over $10 million, there is an urgency to consider a range of moves before the tax cuts expire, financial advisers said. The options range from straightforward gifts to heirs to setting up a complicated trust to protect wealth over generations. Otherwise, the only surefire way to avoid higher taxes is to die before the tax cuts expire.
“We’re looking at a golden opportunity to make tax-free transfers,” said Shamisa Zvoma, a certified public accountant with Wiss in Florham Park, N.J.
The $10 million figure in the Trump tax cuts of 2017 was indexed for inflation. For 2023, the combined gift- and estate-tax exemption is $12.92 million per individual, or $25.84 million per married couple. That is the amount you can give away during your life or at death tax-free.
Next year the exemption amount will likely be adjusted to $13.61 million, estimates Peter Tucci, an estate lawyer at Proskauer. For 2025, it could be $14 million per person, before dropping by half in 2026 to about $7 million.
That would mark the last year to make gifts to take advantage of the historically high amount before the cuts expire after Dec. 31, 2025, estate planners said.
If a couple transfers their full exemption amount of $28 million by 2025, before the law’s sunset, they would get $5.6 million in tax savings if they die in 2026, Tucci said. If they make the gifts to grandchildren, skipping a generation, there would be nearly $9 million in tax savings, he said.
The tax savings could be significantly larger over time. When money grows in these trusts, the appreciation is exempt from the transfer-tax system. So if the trust value goes up $100 million by the time of death, the family would save $40 million in estate taxes, at the current 40% rate. That is just the federal tax savings. There is also state estate-tax savings in states like New York that levy their own estate tax.
There are about 1.5 million Americans with $10 million to $50 million net worth and nearly 125,000 worth more, according to UBS and Credit Suisse economists’ global
What’s the easiest way to make gifts to reduce my estate?
Direct gifts of cash or securities are the simplest. The limit on annual tax-free gifts is $17,000 for 2023, and it is likely to rise to $18,000 in 2024. That means anyone can give tax-free gifts of up to $17,000 to an unlimited number of people. These gifts don’t count against the larger $12.92 million combined gift- and estate-tax exemption.
If you make gifts over $17,000, you generally must report them on IRS Form 709.
Caroline McKay, a senior wealth strategist at CIBC Private Wealth in Boston, said she has clients who make these gifts to such a large pool of relatives, including grandchildren, nieces and nephews, and spouses, they are getting hundreds of thousands of dollars out of their estate each year.
In the case of long-held stocks that have appreciated in value, the issue is particularly complicated. Gift recipients get your original cost basis and owe capital-gains taxes when they sell. If the recipient is in a lower tax bracket, that can work, or it may be better to hold those shares until your death when they would get a stepped-up basis to their value at that time.
When to make gifts via a trust
For individuals facing estate taxes, making gifts to a dynasty trust can preserve more wealth for your children. The trust removes the assets from both your estate and your children’s estates, McKay said. These trusts typically benefit children but also grandchildren and future generations.
Trusts also offer asset protection. If you give assets to your children directly and they get sued or divorced, they could lose some or all of those assets. By contrast, if you make the gifts to a trust, it is harder for a creditor to go after the trust principal, Tucci said.
One downside is that the trust is still subject to capital gains and other income taxes, and the assets won’t get a new stepped-up value on the donor’s death.
Impact of the expiration of the Trump tax cuts It is possible that the higher estate-tax exemption amount could be extended or made permanent. Even when Democrats controlled Congress under the Biden presidency, they didn’t reduce the estate-tax threshold, said William Gale, a senior fellow at Brookings Institution who researches tax and fiscal policy.
“Historically what’s happened is Congress has decided to let the deficits go up,” he said.
Republicans have long favored abolishing the estate tax. Democrats have called for it to be toughened: dropping the exemption amount to $3.5 million, raising the top tax rate to 77% and taxing capital gains at death. They have also called for curbing dynasty trusts. (There were 2,584 federal estate-tax returns filed in 2021, which brought in $18.4 billion in tax revenue.) “You have to assume the exemption amount is going down,” Tucci said. If you’re banking on the exemption staying at $14 million in 2026, that is a gamble, and you’re potentially leaving a lot of tax savings on the table, he said.
How much should I give away?
Do a careful analysis to make sure that you are keeping enough to maintain your lifestyle, said McKay. She has seen instances in which people don’t hold on to enough assets to maintain their lifestyle after the effects of inflation and volatile markets.
Corrections & Amplifications Gifts of over $17,000 generally must be reported on IRS Form 709. An earlier version of this article and an accompanying chart incorrectly stated that such gifts were reported on IRS Form 706. (Corrected on Aug. 20)