How families are avoiding estate taxes: Wealthy Americans have doubled the amount they give each year as Trump-era tax breaks come to an end
- Former President Donald Trump doubled the amount families could give without paying estate taxes
- However, the tax break is expected to end in 2026 and the possibility of an extension is unclear
- Figures from the IRS show that Americans doubled the amount they gave away in 2026
Wealthy families are vying to give their money away as the end of Trump-era lavish tax cuts draws to a close.
In 2017, the former president doubled the amount individuals could give over the course of their lifetime without paying inheritance duties, from $5 million to $10 million.
However, the temporary cuts are set to expire in 2026 – prompting a rush from wealthy families to wire their money.
Figures from the Internal Revenue Service show that Americans donated $182.6 billion in 2021, more than double the $75.2 billion they donated the year before. Gifts valued more than $17,000 per year are reported on IRS Form 709.
Financial planners said couples with net worth over $10 million feel the urgency to protect their wealth from the changes.
Figures from the Internal Revenue Service show families gave $182.6 billion in 2021, more than double the $75.2 billion they gave the year before
New Jersey-based CPA Shamisa Zvoma told The Wall Street Journal, “We see a unique opportunity to make tax-free remittances.”
Of the funds donated in 2021, more than $100 billion was donated through foundations, while an additional $14.8 billion went to charities. Trust funds are a popular way for parents to give away their money while they are still alive—without incurring large tax bills.
Trump’s $10 million limit was indexed to inflation, meaning the gift and inheritance tax exemption was $12.92 million per person through 2023. Married couples can give up to $25.84 million together.
Inheritance is a contentious political issue: Republicans have long advocated eliminating the estate tax altogether, while Democrats have advocated tightening it.
This means there is no guarantee that the current rules will be extended when they expire on December 31, 2025.
Proskauer real estate attorney Peter Tucci told the WSJ that the threshold is expected to be adjusted to $13.61 million next year before raising it again to $14 million in 2025.
Then in 2026, it’s expected to fall by half to $7 million, Tucci predicts.
“You have to assume that the allowance will decrease,” he said.
Inheritance is a contentious political issue: Republicans have long advocated eliminating the estate tax altogether, while Democrats have advocated tightening it
“If you’re betting on the tax exemption staying at $14 million in 2026, that’s a gamble and you’re potentially leaving a lot of tax savings on the table.”
Tucci added that a family that transfers the full $28 million allowance to their children through 2025 could save up to $5.6 million in taxes if they die in 2026.
And the tax savings will be greater in the long run: as money grows in a trust, the increase in value is exempt from transfer tax.
A Global Wealth Report by economists from UBS and Credit Suisse found that there are 1.5 million Americans with net worth between $10 million and $50 million. Another 125,000 citizens are even wealthier.
The numbers come at a time when reports are suggesting that Americans are in the midst of a “great wealth transfer” in which Millennials and Gen Z will pass down $53 trillion from their baby boomer parents before 2045.
Recent research by life insurer New York Life found that adults expecting an inheritance over the next decade will receive an average of $700,000.
In this way you avoid a tax shock on your inheritance
Giving and living at the same time
Under IRS rules, parents can gift up to $17,000 per year to an unlimited number of people with no state gift or estate tax consequences.
And spouses can also donate the same amount—doubling the amount a couple can pass on.
This is especially helpful when an individual is close to achieving the lifetime gift tax exemption, which is $12.92 million per person or $25.84 million for a couple. Money in excess of this is taxed at 40 percent.
Thanks to the Tax Cuts and Jobs Act (TCJA), the $5.49 million per person allowance was increased significantly in 2017. However, this is only a temporary law that will only be in effect until 2025.
Give your home as a gift – and live in it at the same time
By creating a lifetime inheritance, you can gift your property knowing that you will remain a “life tenant” – meaning you can live there until you die.
You’ll also remain responsible for paying mortgage debt, property taxes, and home insurance in the meantime.
This effectively streamlines inheritance and avoids probate testing – the legal process of proving a will.
Set up a trust
In turn, leaving your money in a will can trigger a costly and time-consuming probate process.
In addition, by placing your money in a trust, your heirs may be entitled to a “step-up” interest in real estate.
On a step-up basis, the value of the inherited assets is adjusted to the current market value – helping to reduce capital gains tax in the future.
Capital gains tax is a levy levied on the amount that your assets have appreciated in value over time.
For example, if a parent bought a property for $20,000 and its value has risen to $500,000 today, after their death the property will receive an “appropriation basis” that reflects its true value.
If the heir then sells the property for $700,000, only the $200,000 increase in value is taxed. Without the “step-up” rules, they would have been taxed on the $680,000 in value since their parents first bought it.