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How to Avoid Estate Taxes: A Step-by-Step Guide for Smart Inheritance Planning
Surprisingly, many Americans aren't aware that proper estate planning can legally reduce or even eliminate these taxes. The federal estate tax exemption currently sits at $12.92 million per individual, but this threshold is set to decrease substantially in 2026 unless Congress acts. For those with significant assets, this potential change represents a serious concern.
Fortunately, several effective strategies exist to minimize estate tax exposure. From strategic gifting and charitable donations to specialized trusts and marital deductions, the right approach depends on your unique financial situation.
This comprehensive guide will walk you through practical, legitimate methods to protect your wealth from excessive taxation. Whether you're just starting your estate planning journey or looking to optimize an existing plan, these steps will help ensure your legacy passes intact to the next generation.
Understanding Estate Taxes and Who Pays Them
Estate taxes represent one of the most significant financial hurdles that wealthy families face when transferring assets to the next generation. To effectively plan around these taxes, you must first understand what they are, how they work, and who ultimately bears responsibility for them.
What is the estate tax?
The estate tax is a federal tax imposed on the transfer of property at death, assessed on the decedent's entire taxable estate before distribution to heirs [1]. Often called the "death tax," it applies to the total value of a person's assets at their date of death [2].
This tax differs significantly from an inheritance tax. While estate tax is paid by the estate itself before beneficiaries receive assets, inheritance tax is paid directly by individual beneficiaries who receive property from an estate [3]. Furthermore, the United States does not impose a federal inheritance tax, although some states do [1].
For 2025, the federal estate and gift tax exemption stands at $13.99 million per individual ($27.98 million for married couples) [1]. Any estate value exceeding this threshold faces taxation at rates ranging from 18% to 40% [3]. Additionally, beginning in 2026, the exemption will permanently increase to $15.00 million per individual, indexed annually for inflation, following the One Big Beautiful Bill Act signed on July 4, 2025 [1].
Federal vs. state estate taxes
While federal estate taxes generally impact only high-value estates, state-level estate taxes often have lower thresholds. Currently, 12 states plus the District of Columbia impose their own estate taxes, with exemption thresholds that may be significantly lower than the federal limit [2].
For instance, Oregon's estate tax exemption is just $1 million, whereas Washington's threshold sits at $2.19 million [4]. Consequently, many estates that fall below the federal threshold may still face substantial state-level taxation.
Key differences between federal and state estate taxes include:
- State exemptions are generally much lower than federal ones
- Federal exemption is "portable" between spouses (allowing transfer of unused exemption), whereas state exemptions typically aren't [4]
- States vary significantly in their tax rates and thresholds
- Some states impose inheritance taxes instead of or in addition to estate taxes
Notably, five states currently impose inheritance taxes: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania, with Maryland being the only state that levies both estate and inheritance taxes [1][5].
Who is responsible for paying?
The responsibility for filing estate tax returns and paying estate taxes falls primarily on the executor or personal representative of the estate [2]. This individual must file IRS Form 706 within nine months of the decedent's death [6], although a six-month extension may be requested [3].
In cases where no personal representative has been appointed, the responsibility shifts to "any person in actual or constructive possession of any property of the decedent" [3]. This means beneficiaries who directly receive assets, such as life insurance proceeds or jointly-titled accounts, could potentially face tax liability if the estate fails to pay.
The estate itself pays the taxes before any assets are distributed to heirs [3]. However, if the estate lacks sufficient liquid assets to cover the tax bill, the IRS can pursue beneficiaries under special lien statutes for collection of unpaid taxes with respect to property included in the gross estate [3].
It's important to note that certain transfers are exempt from estate taxes. Assets left to a surviving spouse are generally not subject to federal estate tax due to the unlimited marital deduction [6][3]. Similarly, assets distributed to qualified charitable organizations may pass tax-free [3].
Know the Exemptions and Thresholds
Understanding exemption thresholds is a critical strategy when planning to avoid estate taxes. These exemptions determine whether your estate will face taxation at all, making them the first line of defense in protecting your wealth.
Federal exemption limits
The federal estate tax exemption has undergone substantial increases over the past decade. In 2024, individuals can exempt up to $13.61 million from federal estate taxes [7]. For married couples, this translates to a combined $27.22 million exemption [1].
This generous exemption originated with the Tax Cuts and Jobs Act (TCJA) of 2017, which approximately doubled the previous threshold [1]. Since then, annual inflation adjustments have steadily increased the exemption:
| Year | Federal Estate Tax Exemption |
|---|---|
| 2019 | $11.40 million [8] |
| 2020 | $11.58 million [8] |
| 2021 | $11.70 million [8] |
| 2022 | $12.06 million [8] |
| 2023 | $12.92 million [8] |
| 2024 | $13.61 million [8] |
| 2025 | $13.99 million [8] |
Importantly, these exemptions apply to combined lifetime gifts and estate transfers. Each time you make a gift exceeding the annual gift tax exclusion (which rises to $19,000 per recipient in 2025 [1]), you utilize a portion of your lifetime exemption.
State-level exemptions
Beyond federal considerations, state-level estate taxes can significantly impact your inheritance planning. Currently, 12 states plus the District of Columbia impose their own estate taxes [9]. These jurisdictions often have much lower exemption thresholds than the federal government.
Among states with estate taxes, exemption thresholds vary dramatically:
- Connecticut: $13.99 million (aligned with federal exemption) [6]
- New York: $6.94 million [6]
- Maine: $6.80 million [6]
- Massachusetts and Oregon: $1 million (lowest thresholds) [10]
Connecticut stands alone in matching its exemption to the federal level [6]. Most other states maintain substantially lower thresholds, creating potential tax exposure even when estates fall below the federal limit.
Additionally, five states currently levy inheritance taxes: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania [10]. Maryland uniquely imposes both estate and inheritance taxes [10]. Iowa is currently phasing out its inheritance tax and will fully repeal it by January 1, 2025 [10].
Upcoming changes to exemption laws
Perhaps most crucial for current planning is understanding the scheduled changes to exemption laws. Under existing legislation, the expanded federal exemption is temporary. Unless Congress acts, the exemption will revert to $5 million (adjusted for inflation) beginning January 1, 2026 [4].
This potential reduction represents a significant planning concern. Consider that an estate valued at $7 million would face no federal estate tax under current law, but could incur approximately $800,000 in federal estate taxes after 2025 [11].
Nevertheless, the IRS has confirmed that individuals who take advantage of the current higher exemptions through lifetime gifts won't be penalized retroactively after 2025. The "anti-clawback" regulation ensures estates will be able to use the greater of the BEA applicable to gifts made during life or the BEA applicable on the date of death [4].
Given these looming changes, strategic planning becomes especially critical for estates valued between $5 million and $13.99 million. Utilizing the higher exemption amount before it potentially disappears offers meaningful tax-saving opportunities.
Top Strategies to Reduce Estate Taxes
Effective estate planning requires proactive strategies to minimize tax burdens on your heirs. Fortunately, several proven methods exist for reducing or even eliminating estate taxes altogether. Let's explore the most effective approaches.
1. Spend down your assets
Strategic spending prioritizes assets in your taxable estate first. For high-net-worth individuals with assets exceeding exemption thresholds, thoughtful spending can significantly reduce estate tax liability. Focus initially on depleting assets held in IRAs, ROTHs, and Revocable Living Trusts [12]. The optimal order among these accounts may vary yearly based on your age and estimated tax bracket, often making lower-income years ideal for additional IRA withdrawals [12]. Through careful coordination with financial advisors and estate attorneys, you can maintain your lifestyle while systematically reducing taxable estate assets.
2. Make annual exclusion gifts
The annual gift tax exclusion represents a powerful tool for gradually transferring wealth. For 2025, you may gift up to $19,000 per recipient without affecting your lifetime exclusion [13][14]. Married couples can potentially give $38,000 per recipient annually through gift-splitting [15]. These gifts effectively reduce your taxable estate while benefiting loved ones during your lifetime. Additionally, certain transfers remain exempt from gift taxation entirely, including:
- Payments for qualifying medical expenses made directly to providers
- Tuition payments made directly to educational institutions
- Transfers between spouses [13]
3. Use charitable donations
Charitable giving offers substantial estate tax advantages. Donations to qualified 501(c)(3) organizations are completely excluded from your taxable estate [3]. Each dollar donated results in a direct dollar-for-dollar reduction in your gross taxable estate [3]. For example, a $20 million estate with a $5 million charitable bequest would reduce the taxable amount to $15 million [3]. Moreover, through strategic charitable giving, some estates can eliminate estate tax liability entirely [3].
4. Set up irrevocable trusts
Irrevocable trusts stand among the most effective estate tax reduction tools. Once established, these trusts remove assets from your taxable estate because you technically no longer own them [16]. Popular options include:
- Irrevocable Life Insurance Trusts (ILITs) that prevent life insurance proceeds from being included in your estate [17]
- Grantor-Retained Annuity Trusts (GRATs)
- Qualified Personal Residence Trusts (QPRTs) [18]
5. Consider marriage benefits
Marriage offers significant estate tax advantages through the unlimited marital deduction. This provision allows spouses to transfer unlimited assets to each other without incurring federal estate tax [19]. This benefit effectively postpones estate taxes until the second spouse's death [20]. Married couples can also combine their exemptions for a total of $27.98 million in 2025 [21]. Furthermore, portability allows the surviving spouse to utilize any unused portion of the deceased spouse's exemption amount, potentially doubling their protection [20].
Advanced Tools for High-Net-Worth Estates
High-net-worth individuals often require sophisticated estate planning tools that go beyond basic strategies. For estates significantly exceeding exemption thresholds, these advanced instruments provide powerful tax-saving opportunities while maintaining family access to assets.
Using Spousal Lifetime Access Trusts (SLATs)
SLATs offer married couples a compelling strategy to utilize current exemption amounts. One spouse (the donor) transfers assets into an irrevocable trust benefiting the other spouse, removing those assets from the donor's taxable estate [2]. In 2025, spouses can transfer up to $13.99 million per individual ($27.98 million for married couples) to a SLAT [2]. The donor spouse maintains indirect access through potential distributions to the beneficiary spouse. Importantly, SLATs are typically structured as grantor trusts, meaning the donor spouse pays all income taxes, allowing trust assets to grow tax-free [5].
Leveraging Grantor Retained Annuity Trusts (GRATs)
GRATs provide an exceptional mechanism for transferring wealth while using minimal lifetime exemption. After transferring assets to a GRAT, the grantor receives annuity payments over the trust term (typically 2-10 years) [22]. Any appreciation exceeding the IRS "hurdle rate" passes to heirs tax-free [22]. Consider this example: You transfer $1 million to a GRAT and receive $999,999 in annuity payments, resulting in just $1 in taxable gift [23]. If those assets grow to $1.5 million during the term, the $500,000 appreciation passes to beneficiaries estate-tax free [23].
Qualified Personal Residence Trusts (QPRTs)
QPRTs enable homeowners to transfer residences at reduced gift tax values. After transferring your home to a QPRT, you retain the right to live there for a specified term [7]. The gift tax value equals the home's fair market value minus your retained interest [7]. For instance, a 50-year-old transferring a $5 million home to a 20-year QPRT might report only $1,619,700 as a taxable gift [7]. Following the term, you can rent the property at fair market value [7].
Dynasty and GST-exempt trusts
Dynasty trusts represent perhaps the most potent multigenerational planning tool. These trusts avoid estate and generation-skipping taxes each time wealth transfers between generations [1]. When properly structured in states like Delaware, South Dakota, or Nevada, they can theoretically last forever [9]. The tax savings compound dramatically over generations—a $13 million trust could grow to $528 million by the fourth generation, versus $166 million without dynasty trust protection [1].
State-Level Planning and Relocation Options
While federal estate tax affects only a small percentage of Americans, state-level estate and inheritance taxes can impact many more families with moderate wealth.
States with estate or inheritance taxes
Currently, twelve states and the District of Columbia impose estate taxes, often with much lower exemption thresholds than the federal government [24]. Six states levy inheritance taxes: Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania [25]. Maryland uniquely imposes both taxes [24]. Exemptions vary dramatically—Oregon and Massachusetts have the lowest at just $1 million [24], while Connecticut matches the federal exemption at $13.61 million [25]. Estate tax rates typically range from 10% to 20%, with Hawaii and Washington having the highest top rates [24].
How relocation can reduce tax exposure
Moving to a tax-friendly state represents a legitimate strategy for reducing estate tax exposure. Many retirees relocate specifically for this purpose—Massachusetts residents often move to New Hampshire or Florida where there are no estate taxes [6]. To successfully establish residency, you must take definitive steps: acquire a home in the new state, obtain a driver's license, register to vote, open local bank accounts, and move cherished personal possessions [10]. Remember that simply purchasing property elsewhere isn't sufficient.
Avoiding double taxation
Even after establishing new residency, real estate or tangible personal property located in your former state may remain subject to that state's estate tax [10]. Consider transferring such properties to limited liability companies, as some states treat these interests as nontaxable intangible property [10]. For those with international assets, understanding tax treaties becomes essential, as these agreements determine which country has taxation rights, thereby minimizing double taxation [26].
Conclusion
Protecting your wealth from excessive estate taxation requires thoughtful planning and strategic implementation. Estate taxes can significantly diminish your legacy, potentially claiming up to 40% of assets exceeding exemption thresholds. Though the current federal exemption stands at a generous $13.99 million per individual for 2025, this amount will decrease substantially in 2026 unless Congress intervenes.
Strategic gifting remains one of the most accessible methods to reduce your taxable estate. Annual gifts of up to $19,000 per recipient ($38,000 for married couples) pass tax-free without affecting your lifetime exemption. Charitable donations likewise provide a dollar-for-dollar reduction in your taxable estate while supporting causes you care about.
Married couples benefit considerably from estate tax provisions, especially the unlimited marital deduction and portability of exemptions. These advantages effectively allow couples to protect nearly $28 million from federal estate taxes in 2025.
Sophisticated planning tools such as irrevocable trusts offer powerful tax-saving opportunities for larger estates. SLATs, GRATs, QPRTs, and dynasty trusts can preserve wealth across generations while minimizing tax exposure. Families with substantial assets should certainly explore these options with qualified advisors.
State-level estate taxes often affect more families than federal taxes due to their lower exemption thresholds. Consequently, relocating to a tax-friendly state represents a legitimate strategy for reducing overall tax burden, though this decision requires careful consideration beyond tax implications alone.
The best estate tax avoidance strategy depends on your unique financial situation, family dynamics, and long-term objectives. Therefore, consulting with experienced estate planning professionals becomes essential to develop a comprehensive plan tailored to your specific needs. With proper planning and timely action, you can ensure your hard-earned assets pass to your loved ones rather than to tax authorities, creating a lasting legacy for generations to come.
References
[1] - https://www.schwab.com/learn/story/case-establishing-dynasty-trust
[2] - https://www.schwab.com/learn/story/slat-trusts-estate-planning-strategy-couples
[3] - https://www.strohmeyerlaw.com/can-charitable-donations-help-reduce-estate-tax/
[4] - https://www.irs.gov/newsroom/estate-and-gift-tax-faqs
[5] - https://www.fiduciary-trust.com/insights/spousal-lifetime-access-trusts/
[6] - https://www.citizensbank.com/private-banking/insights/transfer-taxes-and-state-level-estate-planning.aspx
[7] - https://www.schwab.com/learn/story/how-qprt-can-help-reduce-estate-tax
[8] - https://smartasset.com/taxes/all-about-the-estate-tax
[9] - https://www.comerica.com/insights/wealth-management/wealth-preservation/what-is-a-dynasty-trust.html
[10] - https://www.mjcpa.com/are-you-considering-moving-to-a-new-state-to-minimize-estate-tax/
[11] - https://www.findlaw.com/legalblogs/law-and-life/how-will-the-federal-estate-tax-exemption-change-in-2025-affect-my-estate-planning/
[12] - https://httcwealthpartners.com/blogs/wealth-perspectives/how-to-spend-down-assets-to-limit-estate-taxes
[13] - https://www.adamsbrowncpa.com/blog/strategic-gifting-of-assets-can-help-minimize-exposure-to-estate-tax/
[14] - https://www.fiduciarytrust.com/insights/article-detail/trust-estate--tax-planning/two-reasons-to-make-annual-exclusion-gifts-early-in-the-year
[15] - https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes
[16] - https://www.texastrustlaw.com/new-irs-tax-rule-affects-irrevocable-trusts-in-estate-planning/
[17] - https://www.superlawyers.com/resources/estate-planning-and-probate/four-ways-to-reduce-and-avoid-estate-tax/
[18] - https://www.metlife.com/stories/legal/irrevocable-trust/
[19] - https://www.fidelity.com/viewpoints/wealth-management/insights/estate-tax-and-transfers-to-spouses
[20] - https://www.curchin.com/curchin-blog/marital-deduction-and-estate-tax-planning-a-comprehensive-guide/
[21] - https://www.schwab.com/learn/story/estate-tax-and-lifetime-gifting
[22] - https://www.fidelity.com/viewpoints/wealth-management/insights/grantor-retained-annuity-trusts
[23] - https://rsmus.com/insights/tax-alerts/2024/grantor-retained-annuity-trusts-explained.html
[24] - https://taxfoundation.org/data/all/state/state-estate-tax-inheritance-tax-2023/
[25] - https://taxfoundation.org/data/all/state/estate-inheritance-taxes/
[26] - https://www.gierachlawfirm.com/how-should-you-manage-foreign-tax-treaties-in-your-estate-tax-plan/
