Estate Tax Planning: How to Minimize Estate and Inheritance Taxes

The Federal Estate Tax Exemption: Current and Future

The federal estate tax exemption is the amount you can pass to heirs (other than a surviving spouse) without triggering federal estate tax. For 2024, the exemption is $13.61 million per individual. This means a single person can leave up to $13.61M tax-free; a married couple can leave up to $27.22M using portability (the ability to transfer a deceased spouse's unused exemption to the surviving spouse). The exemption is indexed for inflation and has risen significantly from $5.49 million in 2017 before the TCJA. However, the TCJA provisions expire on December 31, 2025. Without new legislation, the exemption will revert to the pre-2018 level of approximately $5 million per individual, adjusted for inflation — estimated at $6.5M to $7M in 2026. The estate tax rate on amounts above the exemption is 40% for federal purposes. Several legislative proposals could change these numbers, making professional guidance essential.

The Gift Tax Annual Exclusion and Lifetime Exemption

The gift tax annual exclusion allows you to give up to $18,000 per recipient per year (2024) without using any of your lifetime exemption. For a married couple, this doubles to $36,000 per recipient. You can give this amount to as many people as you want — children, grandchildren, friends, anyone. Over 10 years, a couple could give $360,000 to one child completely gift-tax-free. These gifts also remove future appreciation on the gifted assets from your estate. The lifetime gift tax exemption is unified with the estate tax exemption — any portion used during life reduces the amount available at death. Currently at $13.61M, any gifts above the annual exclusion amount consume the lifetime exemption. If the exemption drops in 2026, there may be clawback rules for gifts made during the higher exemption period. The IRS has issued proposed regulations indicating that gifts made while the exemption was higher will not be clawed back, but this area remains uncertain. Understand how gifts and inheritances are taxed differently →

Portability and the Marital Deduction

The marital deduction allows unlimited transfers to a surviving spouse without estate or gift tax. You can leave any amount to your spouse completely tax-free. This is not an exemption — it is a deduction that defers tax until the surviving spouse dies. Portability allows the surviving spouse to use the deceased spouse's unused exemption amount (DSUEA). When the first spouse dies, the executor files Form 706 to elect portability, capturing any unused exemption. The surviving spouse's exemption becomes their own exemption plus the DSUEA. For a married couple where each has $13.61M, if one spouse dies, the survivor can have $27.22M of exemption. Portability was made permanent by the TCJA but did not exist before 2011. Without portability, couples used A-B trust structures (credit shelter trusts) to capture both exemptions. Credit shelter trusts remain useful for state estate tax planning and for blended families. Marital deduction and portability explained in depth →

Trusts for Estate Tax Planning

Trusts are the primary legal structure for estate tax reduction. A credit shelter trust (also called bypass trust or A-B trust) is created at the first spouse's death, funding up to the exemption amount. The surviving spouse receives income from the trust but does not own the assets — so the trust assets are not included in the surviving spouse's estate. This captures the first spouse's exemption even without portability. An irrevocable life insurance trust (ILIT) owns life insurance policies outside your estate. Life insurance proceeds are paid to the ILIT, avoiding estate tax. A qualified personal residence trust (QPRT) transfers your home to a trust for a term of years, removing the home's value from your estate if you outlive the term. A grantor retained annuity trust (GRAT) transfers assets that are expected to appreciate to a trust, with the grantor receiving annuity payments. Appreciation above the IRS Section 7520 rate passes to beneficiaries tax-free. A charitable remainder trust (CRT) provides income to you or your beneficiaries for a term, with the remainder going to charity, generating a charitable deduction and removing assets from your estate. Types of trusts for estate planning →

State Estate and Inheritance Taxes

12 states and the District of Columbia impose state-level estate taxes. Some states (Iowa, Kentucky, Maryland, Nebraska, New Jersey, Pennsylvania) impose inheritance taxes — taxes on the beneficiary rather than the estate. State exemptions vary widely: Massachusetts and Oregon have $1 million exemptions. New York has a $6.94 million exemption. Washington has a $2.193 million exemption. Hawaii has a $5.49 million exemption. Estate tax rates range from 10% to 20%. Some states do not offer portability. Some states have separate filing requirements and due dates. If you live in or own property in a state with an estate tax, you need a separate state estate tax plan. For residents of high-tax states, state estate taxes can be a larger immediate concern than federal estate taxes, especially given the current high federal exemption. State-by-state estate and inheritance tax guide →

What happens if I die without an estate plan?

If you die intestate (without a will), state law determines who inherits your assets. The probate process distributes assets according to state intestacy statutes, which typically favor spouses and children but may not reflect your wishes. Assets pass through probate, which is public, time-consuming, and costly. There is no estate tax planning — the estate pays any tax due before distribution. Without a trust, the estate may also be subject to guardianship proceedings for minor children. Dying without an estate plan means you lose all opportunity to minimize estate taxes, control asset distribution, provide for blended family members, protect beneficiaries from creditors, or avoid probate. A basic estate plan (will, power of attorney, healthcare directive) is essential for everyone, regardless of estate size.

Can I avoid estate tax by giving everything away before I die?

You can give away assets during life using the gift tax annual exclusion ($18,000 per recipient per year) and lifetime exemption. However, the recipient takes your cost basis (carryover basis) rather than a step-up in basis at death. This means the recipient will pay capital gains tax on the full appreciation when they sell. By contrast, assets inherited at death receive a step-up in basis to their date-of-death value, eliminating the capital gains tax on pre-death appreciation. The choice between making lifetime gifts (removing future appreciation from your estate but losing the step-up) and holding assets until death (keeping the step-up but potentially paying estate tax) depends on your specific situation. For highly appreciated assets, the step-up in basis often makes holding until death more tax-efficient than lifetime gifting. For assets expected to appreciate rapidly, lifetime gifting may be better because it removes the future appreciation from your taxable estate. Step-up in basis rules and strategies →

How does the 2026 exemption sunset affect my estate plan?

The scheduled reduction in the federal estate tax exemption from $13.61M to approximately $6.5-7M per person at the end of 2025 creates a significant planning window. If your estate is between $7M and $27M, you may currently be below the exemption but could face estate tax after 2025. Strategies to consider: make large gifts before the exemption drops to lock in the current higher exemption; use GRATs, sales to intentionally defective grantor trusts (IDGTs), or other sophisticated techniques to transfer appreciation out of your estate; consider restating existing trusts to include tax-specific provisions. The IRA's proposed anti-clawback regulations provide some comfort that gifts made while the exemption is high will not be retrospectively penalized, but the regulations are not yet final. Working with an experienced estate planning attorney is essential to navigate this transition period.

What estate planning documents do I need?

Every adult needs four basic documents: a last will and testament (directs asset distribution, names guardians for minor children); a durable power of attorney (authorizes someone to manage your finances if you become incapacitated); an advance healthcare directive (also called living will — specifies medical treatment preferences and names a healthcare proxy); and a HIPAA authorization (allows medical providers to share information with designated individuals). For those with estate tax concerns, additional documents may include: a revocable living trust (avoids probate, provides privacy); an irrevocable life insurance trust (removes insurance from your estate); a qualified terminable interest property trust (provides for surviving spouse while ensuring children inherit remaining assets); and a family limited partnership (facilitates valuation discounts for business interests). Document requirements vary by state and should be prepared by an attorney licensed in your state. Essential estate planning documents and strategies →

Related Resources