Wealthy Americans worried about who will win the White House are preparing to accelerate a huge transfer of wealth to their heirs by using large estate-tax breaks set to expire at the end of next year.
Those breaks came in the 2017 Republican tax law, which doubled the amount the wealthy could pass on without paying the estate and gift tax. Rich Americans can move about $14 million out of their estate by next year to avoid a 40% tax when they die. The limit reverts to about $7 million in 2026, creating a use-it-or-lose-it exemption as the “tax cliff” deadline nears.
“This is the hottest topic in estate planning,” said Mitchell Drossman, head of national wealth strategies at Bank of America. “The most important factor is the outcome of the election.”
Some are waiting to see if Donald Trump wins the U.S. election on Nov. 5 and Republicans can wrest control of Congress, which they hope will increase the chance of extending the higher lifetime exemption he signed into law as president. Wealth managers fear that if Vice President Kamala Harris wins, she could maintain the new $7 million limit while raising taxes on the rich.
Representatives for the Trump and Harris campaigns didn’t reply to requests for comment.
A massive wealth transfer is already underway, with the potential to exacerbate existing inequality in the U.S. About $72.6 trillion in assets will be passed down to younger generations through 2045, according to a 2022 study by the research firm Cerulli. Revenue from the estate tax has increased in recent years, with 3,170 wealthy families paying $22.5 billion to the U.S. Treasury in 2022, compared to 1,275 families paying $9.3 billion in 2020, according to Internal Revenue Service data.
“It’s been bubbling for years and now it’s coming to a head,” said attorney David Handler, a trusts and estates partner at Kirkland & Ellis.
Looming Changes
The estate-tax break can apply to many forms of wealth, including cash or shares of a company, or other harder-to-value assets like art or stakes in a business. When the limit is halved at the end of 2025, the $7 million that can no longer be moved from an estate would result in a tax bill of about $2.8 million when the owner dies.
Every extra dollar exempt from the estate tax can be super-charged, using leverage as well as loopholes that Democrats have repeatedly tried to plug. Common techniques give heirs the risk-free right to profit from the upside on an asset, a powerful benefit when the investment does well.
In 2022, Oklahoma oil baron Harold Hamm used sophisticated estate planning to pass $2.3 billion to each of his five children. A Bloomberg analysis identified at least $9 billion transferred by Nike Inc. founder Philip Knight to his descendants.
To prepare for the looming changes, advisors have stepped up work on customizing gift plans for rich clients.
For families with younger children and not as much wealth, the full exemptions may not make as much sense because they can’t afford yet to give away a large chunk of assets, said Ann Bjerke, head of advanced planning at UBS Group AG.
“For a client with net worth of $100 million-plus, those conversations and analyses are easier,” Bjerke said. “For those on the border, with $25 million, it may not be as easy. We don’t want them to give away assets they need during their lifetime.”
Workarounds exist for rich clients who aren’t ready to lose all access to assets they want to shield from gift and estate taxes.
A popular choice is the spousal lifetime access trust, or SLAT, which allows a person to move assets out of their estate while letting their spouse access the money and their children or grandchildren to benefit. As long as the couple remains married, they may both benefit from the assets. They can even both set up SLATs, as long as they differ in structure.
‘Very Personal’
Giving the right mix of assets to a trust is critical to a well-designed estate plan, advisors said.
While cash and securities are an option, it may make more sense to give assets that will “pop” in value, like ownership stakes in a private business or carried interest—the share of profits derived from private equity or a venture capital fund’s investments. The goal is to move high-growth assets out of an estate and into a trust to minimize estate taxes.
Carried interest is “a great asset to plan with” because a fund may not pay distributions for several years but “it has such an exponential growth potential,” said Bryce Geyer, a Stout managing director who conducts valuations of companies, carried interest and other related assets.
Amber Slattery, a Paris-based advisor to high-net-worth clients globally, said she has been fielding a flurry of inquiries about the U.S. gift tax changes in recent weeks.
“I’m having conversations like, ‘Do you want to give half of an interest of your house to your children? Do we gift family heirlooms?’” Slattery said. “It ends up being a very personal decision. With liquid assets, it’s cleaner and easier—and those tend to be higher appreciating assets.”
Particularly complicated cases involve decisions like divvying up family businesses and vacation homes. A business owner might have to decide, under time pressure, whether to give children a stake in the company, and whether to divide up those stakes evenly, for instance.
“It brings a lot to the surface,” she said. “Anything where everybody has an emotional interest, it’s illiquid, you have to gift it in shares. A business and a home share a lot in that regard. It’s wrapped up in a family story.”
This article was provided by Bloomberg News.