Inflation lets wealthy Americans give heirs even more tax-free

Even after a year in which the vast majority of the wealthiest Americans lost a chunk of their fortunes — and in some cases, lost big — in at least one way, they’re still coming out ahead.

The rich are starting 2023 with millions more dollars that they can lavish on future generations without triggering the U.S. estate and gift tax. Last year’s inflation, the highest in decades, means married couples can now hand their heirs almost $26 million tax-free, $1.7 million more than in 2022 and $2.4 million more than in 2021.

The hike in the lifetime estate-and-gift tax exemption — adjusted for price growth annually by the Internal Revenue Service — is the largest since 2018, when the amount was doubled by Republican-passed legislation signed by former President Donald Trump the prior year. As a result, the individual exemption, which is easily shared between spouses, has rocketed to $12.9 million from $5 million in 2011.

Rich Americans may be running out of time to pass on this much wealth. The exemption is slated to be cut in half in three years, when provisions of Trump’s tax law are set to expire. While even $26 million is a drop in the bucket for the ultra-rich, the exemption’s size shows why generational wealth transfers — estimated by research firm Cerulli to total almost $73 trillion in the U.S. through 2045 — go largely untouched by the government. Plus, advisors can use loopholes and leverage to multiply the amount of tax-free money available to heirs.

Add in future annual increases as prices continue to rise, and for wealthy heirs “there is going to be a lot to work with,” said Brandon Smith, director of estate planning at Wetherby Asset Management in San Francisco. “The falling markets and rising rates isn’t all bad news. It just signifies a shift in the planning devices that make sense.”

Even for the rich, though, giving away millions of dollars doesn’t come easy, said Lisa Featherngill, national director of wealth planning at Comerica Wealth Management. For many, “it’s a multiyear process,” she said. One option is to set up spousal trusts, which allows a husband or wife to access money if necessary, making the transfer feel less permanent.

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Advisors say the most popular vehicle for gifts is the dynasty trust, a pool of wealth that can fund many generations without ever facing the U.S.’s 40% estate tax levy. The ultra-wealthy typically lend assets to these trusts in order maximize their exemption.

Rising rates make some of these strategies more difficult — so advisors say they’re shifting their approach. Some techniques, including those involving charitable assets and personal residences, actually benefit from higher rates by reducing the present value of future transfers to heirs.

Many Republicans have long opposed the estate tax, which they’ve labeled the “death tax.” Democrats have argued it’s an important tool to reduce inequality and proposed ways of plugging loopholes.

With the higher exemption set to expire in 2026, the fate of the estate tax may depend on the results of the 2024 election.

“If I could see the future, I would be able to advise my clients with more certainty,” said Michael Levy, a partner at Crowe, an accounting firm. “You’re making a decision right now for people who may live another 25 years and could go through four or five different presidents.”

For now, he and other advisors are telling clients to take advantage of the increased exemption while they still can.

“All we can do is live in the now,” Levy said.

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