Rich People Rush to Offload Wealth Before Estate Tax Break Drops

Wealthy taxpayers are hurrying to use the increased estate tax exemption amount before it potentially expires at the end of 2025.

Republicans’ 2017 tax-cut law doubled the estate tax exemption but built in a 2025 sunset. Those with over the exemption amount, which stands at about $13.6 million per person for 2024, in gifts or in their estate face a 40% transfer tax.

It’s unclear what the estate tax will look like after 2025, with the future of the exemption and many other 2017 law provisions hinging on the 2024 election. Republicans have long criticized the estate tax and have made multiple bids to repeal it entirely, while Democrats see the tax as a way to raise revenue from the ultra-wealthy.

Given the uncertainty of the exemption amount down the line, wealthy individuals are scrambling to lower the value of their estate and make large gifts in the next two years.

“We’re in the shot clock,” said Emily Plocki, an estate lawyer at Venable LLP, about using the elevated exemption. “It’s now or never.”

Laura Hinson, a Deloitte managing director who specializes in family wealth planning, said she expects three to four times more gifts this year than typically because of the impending sunset.

“If people wait until 2025 and they want to make transfers and use their exemption, they could have trouble finding an attorney with the bandwidth to prepare a new trust document,” Hinson said in an interview.

Large Gifts and Planning

Wealthy taxpayers have slowly started making gifts since 2018 to use the increased exemption, Hinson said, but now there’s a major uptick in activity.

Planning for these gifts years before the sunset help prevent donor’s remorse and ensures that estate lawyers have time for new returns, estate lawyers said. Some assets also may need appraisals.

Plus, estate lawyers often do cash-flow planning for their clients to make sure they still have enough money after their gifts to support themselves, Hinson said.

“Putting in plans at the last minute could result in transferring too much or not the right assets,” Hinson said. “Or it could leave Mom and Dad without adequate assets to fund their lifestyle.”

IRS guidance in 2019 said that taxpayers can use the higher exemption amount and not be penalized later if it changes.

“It’s a use it or lose it scenario,” Plocki said. “You have to make large gifts considering what we think the exemption amount will be in 2026 to really take advantage of this opportunity.”

Preparing for Sunset

Estate-tax lawyers pointed to several types of trusts taxpayers can utilize now to take advantage of the current exemption amount.

One of the most common ways to lower the value of an estate is to create a spousal lifetime access trust, estate lawyers said. This strategy allows the donor spouse to still receive benefit from the assets since their partner now controls it. But if the couple gets divorced or the beneficiary dies, the donor loses access.

Practitioners noted in materials for a recent American Law Institute webcast that this type of trust was a planning opportunity for lawyers this year and next.

There are “strings” that a person creating the trust could attach, Plocki said, but they run the risk of the IRS deeming it an improper gift—still considering it a part of their estate.

Another popular option is a dynasty trust, which benefits the donor’s future generations. A taxpayer also could put a business asset that continues to appreciate in the trust and still pay the income tax, further lowering the value of their estate.

Since dynasty trusts are intended to be in place for a long time, these should be designed with some flexibility, Hinson said.

A common strategy is adding a trust protector, who can modify the agreement, Hinson said. The donor can choose how the protector can alter the trust, whether that’s adding or removing beneficiaries or tweaking based on law changes. Trust protector popularity has grown in the last few years, she said.

Cautious Gifting

But for those who may need to get their money back—whose estates are worth around or less than the elevated exemption amount—it may be overkill to try and use the elevated exemption before 2026, estate planners said.

“There are a lot of people for whom using the exemption doesn’t make sense at all because using it would involve giving away a property they really shouldn’t be,” said Beth Shapiro Kaufman, a partner at Lowenstein Sandler who previously worked in the Treasury Department. “Like the home they live in, for example.”

There was a similar push to use an elevated exemption in 2012, but then the exemption amount didn’t decrease, said Meghan Muncey Federman, an associate at Lowenstein Sandler. Taxpayers were unhappy they no longer had access to the money they gifted.

“When you’re planning this, you have to be willing to part with the money you’re giving away for real,” Federman said.