The way the richest people decide to give away some of their wealth is changing. Gary John Norman – Getty Images
keyword Succession Theme song. Less than 15 years ago, the federal estate tax exemption — the amount someone can pass to their heirs tax-free — was about $2 million. Today, the exemption stands at $13.61 million, thanks to a series of changes in U.S. tax law, most notably the Tax Cuts and Jobs Act of 2017 under President Donald Trump, which doubled the exemption amount.
That means a married couple can give away more than $27 million before incurring the tax, which can be as high as 40% on assets above that threshold. And that has changed the way high-net-worth (HNW) and ultra-high-net-worth (UHNW) individuals decide to give away their wealth.
These days, with so much more money at stake, mom and dad are much more active when it comes to what their heirs can do with the money left to them, says Emily Irwin, managing director of advisory and planning at Wells Fargo's Wealth & Investment Management who previously worked with HNW and UHNW clients in his private practice. Trusts are the norm, and it's becoming increasingly common to delay the age at which beneficiaries can access the money – rather than when someone is in their 20s, some distributions are delayed until those individuals reach their 30s, 40s, or later years.
“We see so many people saying, 'We want to get it off our balance sheet, but we don't necessarily want our children and grandchildren to have full access to it,'” Irwin says Assets. “We know that previously you had the ability to manage this money, but now that these numbers are so much larger, we will bring in some help to ensure that this trust is sustainable for the long term.”
There are a number of reasons for this, including to protect it from divorce, creditors, etc. “It's not just 'We don't trust you,' it's also 'We want to protect you,'” Irwin adds.
And of course, some wealthy individuals simply don't want to give away such a large sum of money without having a say in how it is used. Irwin says independent fiduciaries are more common to ensure distributions are made properly. Giving away $2 million requires less manipulation than giving away nearly $14 million.
For example, when assets are transferred through a trust, the donor can specify any number of conditions prior to distribution. For example, an heir must attend a certain school or achieve a certain grade point average. They may need to divide the funds for specific philanthropic purposes, or the distributions may need to match the heir's salary to ensure they can continue to work.
What this means for the “great transfer of wealth”.
These developments are likely to have a major impact on the upcoming $84 trillion “great wealth transfer.” More and more billionaires are acquiring their wealth through inheritance rather than through entrepreneurship. According to a 2023 report by Oxfam, half of the world's billionaires live in countries where there is no inheritance tax on money given to children.
Another reason the rich put more conditions on what they give away is that they are more likely to do so while they are still alive, says Irwin. That means they want to see how it's used – and have a bigger say.
“We may see a letter of intent that guides the trustee and that is informal. “My expectation would be an A, B, C lifestyle,” Irwin says. “I like that because it is communication that can be informative but not controlling.”
And heirs continue to benefit in other ways, such as by covering medical bills or school fees – although these direct payments do not count towards the gift and estate exemption – or by paying for a home renovation. Some receive an intra-family loan at extremely favorable conditions. And each year, their patrons can give away a certain amount of money — $18,000 in 2024, double for couples — tax-free per recipient, without invoking their lifetime gift or estate tax exemptions.
The current wealth tax exemption could expire at the end of 2025 when certain provisions of the 2017 tax law expire. If Congress does not extend the cuts, it would cut the exemption in half – meaning some HNW individuals will struggle to pass on some of their wealth while the higher exemption applies.
“It's a perfect storm of 'We can give more, we think it can go away, they need more,' and this new feeling of 'We want to see it in our lifetime, our dollars at work,'” says Irwin. “It will grow exponentially, people will work with their advisors to think about it in the months and weeks before it goes down.”
