Estate Tax Incentives Drive Wealth Into Foundations
What Happened
A policy analysis published in August 2026 by a Heritage Foundation research fellow examines how the federal estate tax structure systematically redirects private wealth away from taxable estates and into tax-exempt foundations and nonprofit organizations. The piece argues that the estate tax, despite its progressive intent, functions as a powerful incentive for the ultra-wealthy to donate appreciated assets to charitable foundations rather than pay estate taxes or transfer wealth directly to heirs.
The analysis highlights the scale of this phenomenon by pointing to several high-profile examples. MacKenzie Scott distributed $26 billion to charitable causes following her 2019 divorce. Warren Buffett pledged 99% of his estimated $170 billion fortune. Bill Gates donated more than $100 billion and committed to spending his foundation to zero by 2045. George Soros directed $32 billion into his Open Society Foundations. The author argues these decisions share a common driver: the tax code makes nonprofit foundations the most economically rational destination for large appreciated fortunes.
The analysis describes a structural dynamic in which founders accumulate appreciated company stock, borrow against it rather than sell to avoid capital gains taxes, hold assets until death to benefit from a stepped-up basis, and then donate to foundations rather than pay estate tax. The federal estate tax currently affects roughly 0.07% of estates and raises less than 1% of federal revenue, down from more than 7% of estates in the mid-1970s. A University of Pennsylvania Wharton School study cited in the piece confirms that tax avoidance contributes to declining estate tax revenue. The nonprofit sector now represents approximately 15% of U.S. gross domestic product, up from roughly 4% in 1970, and holds more than $8 trillion in assets.
What It Means
The federal estate tax currently carries a top rate of 40%26 USC 2001(c)Verified Jul 13, 2026View source on taxable estates above the federal exemption threshold of $15,000,00026 USC 2001(c), 2010; P.L. 119-21 §70106Verified Jul 13, 2026View source per individual, or $30,000,00026 USC 2001(c), 2010; P.L. 119-21 §70106Verified Jul 13, 2026View source for married couples using portability. The analysis argues that this rate is extractive enough to incentivize avoidance but not high enough to generate substantial revenue, creating a structural gap that benefits charitable foundations over direct heirs or the Treasury. The annual gift tax exclusion of $19,00026 USC § 2503(b); Rev. Proc. 2025-32 § 4.42Verified Jul 13, 2026View source per recipient provides an additional mechanism for reducing taxable estates over time, though the analysis focuses on the far larger impact of charitable deductions at death.
For New York residents, this federal dynamic intersects with a separate and significant state-level tax burden. New York imposes its own estate tax with an exemption of $7,350,000N.Y. Tax Law §§ 951–971Verified Jul 13, 2026View source — less than half the federal threshold — and a top rate of 16%N.Y. Tax Law §§ 951–971Verified Jul 13, 2026View source. This means a New York estate that falls below the federal exemption may still owe substantial state estate tax. New York's estate tax also carries a notable "cliff" effect: estates that exceed the exemption by more than 5% lose the benefit of the exemption entirely, making the effective marginal rate on amounts just above the threshold dramatically higher than the stated top rate. This structure amplifies the incentive dynamics the analysis describes, pushing New York's wealthiest residents toward charitable giving strategies to reduce their combined federal and state estate tax exposure. New York does not impose a separate inheritance tax on beneficiaries.
The analysis also raises questions about the stepped-up basis rule, which reset to fair market value on the date of death26 USC § 1014Verified Jul 13, 2026View source. This rule eliminates capital gains tax on appreciation that occurred during the decedent's lifetime, creating a powerful incentive to hold appreciated assets until death rather than sell during life. For founders with large positions in company stock, this represents an enormous tax benefit. The combination of the stepped-up basis and the charitable deduction effectively allows billionaires to transfer appreciated assets to foundations without triggering either capital gains tax or estate tax. For New York families navigating estates near the state exemption of $7,350,000N.Y. Tax Law §§ 951–971Verified Jul 13, 2026View source, understanding how asset appreciation and charitable giving interact with both federal and state tax rules is a central planning consideration. The distinction between estate tax and inheritance tax matters here, as New York's estate tax falls on the estate before distribution rather than on individual beneficiaries. Families with estates approaching these thresholds often explore strategies involving irrevocable trusts, annual gifting programs, and life insurance to manage their combined tax exposure. For a broader overview of how these concepts fit together, the Glossary of Basic Estate Planning Terms provides accessible definitions of key vocabulary.
The structural critique in the analysis extends beyond tax policy to governance. Donor-advised funds, which the analysis notes now hold more than $300 billion, allow donors to take an immediate deduction while retaining advisory influence over how funds are eventually distributed. Unlike private foundations, donor-advised funds face no minimum annual distribution requirement, meaning capital can accumulate indefinitely in a tax-advantaged structure. For estate planners and their clients, this creates a planning option that provides immediate tax benefits while preserving long-term philanthropic flexibility. The tradeoff is that assets transferred to donor-advised funds or private foundations leave the taxable and inheritable estate permanently, a consideration that directly affects how much wealth passes to direct heirs. Families weighing charitable giving strategies alongside direct inheritance planning benefit from understanding how these tools interact with both federal and New York state tax rules.
Context from SimplyTrust
The policy dynamics described in this analysis affect a relatively small number of estates at the very top of the wealth distribution. The federal exemption of $15,000,00026 USC 2001(c), 2010; P.L. 119-21 §70106Verified Jul 13, 2026View source means the vast majority of Americans face no federal estate tax. However, New York's lower exemption of $7,350,000N.Y. Tax Law §§ 951–971Verified Jul 13, 2026View source brings a broader range of New York families into the estate tax planning conversation, particularly those who own appreciated real estate, business interests, or investment portfolios that have grown significantly over time. For families in this range, the core tools of estate planning — revocable trusts, beneficiary designations, powers of attorney, and healthcare proxies — remain the foundation of a sound plan regardless of tax exposure. Understanding how trusts help families avoid probate and maintain privacy is relevant for estates of all sizes, not just those approaching tax thresholds.
SimplyTrust does not provide tax advice, and the charitable giving strategies discussed in this analysis involve complex interactions between federal and state tax law that benefit from guidance from a qualified tax advisor or estate planning attorney. What SimplyTrust does provide is accessible estate planning infrastructure — the documents and organizational tools that form the foundation of any plan. For New York families thinking through how their estate documents work together, the overview of the probate process explains what happens to assets that pass outside of a trust or beneficiary designation, and why the structure of an estate plan matters independently of its tax implications. Estate planning is not solely a tax exercise — it is the process of ensuring that the people and causes important to you receive what you intend, on your timeline, with minimal court involvement and maximum clarity for the people you leave behind.