The 2017 Tax Cuts and Jobs Act nearly doubled the lifetime estate and gift tax exemptions wealthy individuals are able to use—from $5.6 million to $11.18 million for individuals, indexed for inflation after 2018. For 2023, the indexed exemption rose to $12.92 million ($25.84 million for married couples) and the IRS increased the amount to $13.62 million (or $27.24 million for married couples).

However, these exemptions all sunset in 2025.

While many high-net-worth investors have been hesitant to fully use their exemptions by locking their assets into trusts for future generations—out of hope that Congress may extend the exemptions or fear the IRS may claw back transferred assets—the hesitancy is waning, and investors have become more eager to max out their exemption before it is cut in half, advisors said.

“I think that the timing of the potential sunset has given clients a ‘use it or lose it’ mentality,” said Scott Bishop, a CPA and partner at Houston-based Presidio Wealth Partners.

Investors are no longer worried the IRS will claw back exemptions, Bishop said. That’s because the IRS issued final regulations in November 2019 confirming that individuals taking advantage of the increased gift and estate tax exclusion amounts in effect from 2018 to 2025 will not be affected after 2025 when the exclusion amount is scheduled to drop to pre-2018 levels.

But shifting political winds and public policy are also driving investors’ decisions. “With the large $37 trillion government debt and many on the progressive side wanting to ‘tax the rich,’ many investors feel it is likely that this current benefit will go away. I think wealthy people will feel they will regret not taking advantage of a current tax benefit that may be lost,” Bishop said.

As a result, more wealthy baby boomers are looking for ways to create multigenerational wealth. All-time highs in the stock market and clients’ liquidity events—like when they sell businesses—have made this desire even more prevalent, the veteran wealth manager said.

As a result, Presidio is discussing trust options with individual clients with a net worth of $7 million and married couples with $14 million to see if they want to take advantage of the exemptions before these are significantly cut down after the sunset on January 1, 2026.

“If they don’t use up to $13 million each now, then a significant portion of that may be taxed at 40% when they pass away. Also, lifetime gifts made now will ‘freeze’ the value of the gift where all future growth in those assets will be outside of both the grantors’ and beneficiaries’ estate. In many cases, there is also the benefit of asset protection,” Bishop said.

Irrevocable Trusts
Scott S. Van Den Berg, president and principal of Century Management Financial Advisors in Austin, Texas, is setting up irrevocable trusts for a couple that has a $50 million estate. The trusts, set up for their three kids and six grandkids, carry stipulations about how and when the money will be distributed. “This allows the client to fund these trusts in a large enough way so that they can move money out of their estate while the current lifetime estate and gift tax exemption is $27,220,000 and, at the same time, have some level of control over the money depending on the stipulations they write into the trusts,” Van Den Berg said.

“They would give their kids and grandkids the money upon their demise anyway, but given that the estate and lifetime gift tax will expire at the end of 2025 and be reduced to about half, taking advantage of this higher tax exclusion is powerful. If they did not take advantage of the current exemption, it could potentially cost them upwards of $5 million more in taxes. Thus, they can give $5 million more to family and friends versus the IRS,” he added.

Bishop said Presidio uses a variety of trusts, depending on the clients’ goals and circumstances. Since most of his clients live in Texas, the firm uses grantor/defective generation-skipping trusts because Texas law allows these vehicles to stay operational for 300 years, giving families centuries to protect and grow assets. Shopping for the best trust “situs” (state) to suit a client’s needs may be important for larger gifts, Bishop said. 

By skipping the grantor’s children, the assets are subject to estate tax only once, when they pass to the grandchildren. Generation-skipping trusts can be structured to provide for the grandchildren’s education, healthcare and other needs over time and can ensure a lasting legacy beyond the grantor’s lifetime. Such trusts also give grantors control and flexibility, since grantors can specify how the trusts operate, including their distribution rules, investment strategies and conditions for disbursements. This control allows customization to fit the family’s unique circumstances, Bishop said.

“We also like to use ‘defective’ or grantor trusts so that we don't have to worry about trust tax brackets,” he said. “Having the grantor pay the taxes also has two other benefits. It reduces any remaining estate subject to taxes and allows the trust to continue to grow income-tax-free until the grantor dies or amends the trust to no longer be defective,” Bishop said.

He added, “We also use spousal lifetime asset trusts [SLATs] for those who want to use their estate exemption credits but are not ready to give away that much to the next generations.” A SLAT is an irrevocable trust created by one spouse for the benefit of the other spouse. 

Hazel Secco, founder and CEO of Align Financial Solutions, an LPL-affiliated firm that caters to women investors, said she likes to use charitable lead annuity trusts (CLATs) for wealthier investors who are charitably inclined because these trusts not only support clients’ philanthropic goals but also provide tax-efficient wealth transfer to loved ones.

A CLAT lets investors maximize their charitable impact by providing regular income to a chosen charity over a set period. Once the term of the trust ends, the remaining assets in the trust are passed on to the grantor’s beneficiaries. The structure is especially advantageous to investors who hold appreciated assets, such as high-value stocks, as it helps the investors avoid capital gains taxes.

“CLATs have become particularly appealing due to the expiring estate and gift tax exemptions. With the sunset of the Trump tax cuts approaching, many are eager to align their retirement and estate planning with these potential changes,” Secco said. “People who have always been philanthropic are now more likely to act quickly. By taking advantage of the current tax benefits, they can effectively transfer wealth, support their favorite causes, and leave a lasting legacy for their heirs. It’s like killing three birds with one stone.”

Seth Mersky, an attorney with Gunster, a Miami-based law firm that caters to high-net-worth business owners, said clients have become much more attentive to his message about using the gift and state exemptions before they disappear.

Wealthy investors using the exclusion now can preserve almost $28 million in assets that won’t be taxed when they die. “Using your lifetime exclusion is very powerful because it takes assets out of the estate, which would otherwise be subject to a 40% estate tax at death, plus a potential second-generation skipping tax,” Mersky said.