What Is the Estate Tax and Who Pays It?

The estate tax – sometimes called the “death tax” – is a federal tax on the transfer of wealth at death. Thankfully, most Americans will never owe this tax because of a very high exemption threshold. In 2025, the federal estate tax only kicks in if an individual’s estate exceeds $13.99 million (approximately $27.98 million for a married couple) (kiplinger.com). In other words, only the wealthiest 0.2% of taxpayers currently face federal estate taxes. Anything above the exemption is taxed at a steep rate of up to 40%.

However, this generous exemption won’t last forever. Under current law, the estate tax exemption is set to drop by about half after 2025 (kiplinger.com). This means many families who are comfortably under the limit today could be over the limit in a few years. For example, the exemption could fall to roughly $6–7 million per person in 2026, exposing more estates to a 40% tax on amounts above that. On top of that, 12 states (and D.C.) impose their own estate or inheritance taxes with much lower thresholds (some as low as $1 million). If you live in a state like Massachusetts, New York, or Oregon, you could face a double tax whammy – state and federal – on your estate.

Bottom line: If your net worth (including life insurance, real estate, investments, etc.) might approach these limits, it’s critical to plan ahead. Without proper planning, your heirs could lose ~40% of the wealth above the exemption to taxes. The good news is there are legal strategies to avoid or drastically reduce estate taxes, ensuring more of your legacy goes to your family and causes you care about rather than the IRS.

Why Avoiding Estate Tax Is Important

Imagine spending a lifetime building a business, saving, and investing, only to have 40% of everything above the limit taxed away when you die. Estate taxes can amount to millions of dollars for high-net-worth families. For example, an estate $5 million over the federal exemption might face roughly a $2 million tax bill (about 40%) – money that could have supported your spouse, children, or a favorite charity. Proper estate planning can prevent such costly outcomes. By using the strategies below, families have completely avoided a potential 38%–40% estate tax hit, saving millions that stayed in the family. In short, estate tax planning is about protecting your lifetime of wealth from unnecessary taxation, so you can secure your family’s financial future.

The strategies to minimize estate taxes range from simple tax-free gifts you can give each year, to more complex tools like trusts and family partnerships used by ultra-wealthy families. Don’t be intimidated – even a few basic moves can make a big difference. Below we break down the most effective ways to avoid estate tax and keep more of your wealth in the family.

Top Strategies to Avoid Estate Tax Legally

Achieving a tax-free inheritance for your heirs is possible – but it requires careful planning. Here are some proven strategies (used by everyone from everyday families to billionaires) to reduce or eliminate estate taxes:

1. Make Tax-Free Gifts During Your Lifetime

One of the simplest ways to shrink your taxable estate is to give away assets while you’re alive. The IRS allows you to gift up to $19,000 per year (in 2025) to any number of people tax-free (this is the annual gift tax exclusion) (kiplinger.comkiplinger.com). If you’re married, you and your spouse can split gifts, effectively giving $38,000 per recipient per year without triggering any gift tax filing (kiplinger.com). For example, a couple with two children and two grandkids could gift each of them $38,000 this year – transferring $152,000 out of their estate tax-free in one swoop.

Over time, annual gifting can significantly reduce the size of your estate, especially if you start early. Even moderately wealthy families can give a few thousand dollars to each child or grandchild every year. These gifts do not count toward the estate tax when you die. Just be careful not to exceed the annual limit per person; if you do, the excess counts against your lifetime exemption (the same $13.99M combined limit for gifts and estate) (blog.cmp.cpa).

Pro tip: Some gifts are entirely unlimited and tax-free if made directly. You can pay tuition or medical expenses for someone else in any amount without it counting toward your $19K limit or lifetime exemption (kiplinger.com). For instance, directly paying a grandchild’s college tuition or an aging parent’s medical bills is a smart way to help your family while also reducing your taxable estate.

2. Use the Marital Deduction and Portability

If you’re married, you have a huge tax advantage: transfers to a U.S. citizen spouse are completely estate-tax-free. This is known as the unlimited marital deduction. It means you can leave 100% of your assets to your spouse with no federal estate tax due at the first death. The estate tax is deferred until the surviving spouse passes away.

In addition, current law provides “portability” of the estate exemption between spouses. In plain English, this means if one spouse dies and doesn’t use up their whole $13.99M exemption, the surviving spouse can add the unused amount to their own exemption. Together a married couple can shield nearly $28 million from estate tax in 2025 (kiplinger.comkiplinger.com).

Example: Say a couple has a $20 million estate. With proper planning, when the first spouse dies, no estate tax is due – the assets can pass to the survivor tax-free. If they structure their estate plan to use both exemptions, when the second spouse dies, the first spouse’s unused exemption extends the survivor’s exemption. Their children could inherit the full $20M with $0 estate tax. (Note: Without planning, the second spouse’s estate might only shelter $13.99M and face a 40% tax on the rest.)

Action item: Ensure your estate plan includes a “portability” election or bypass trust so that no exemption is wasted. Simply being married isn’t enough – you need the right wills or trust provisions to take advantage of both spouse’s coupons.

3. Set Up Irrevocable Trusts to Remove Assets from Your Estate

Trusts are one of the most powerful tools to avoid estate taxes. When you transfer assets into an irrevocable trust, those assets are no longer considered part of your estate (as long as you don’t retain certain control rights). The assets in the trust can grow and ultimately pass to your heirs outside of your taxable estate.

There are many types of trusts, each suited to different situations. Here are a few of the most effective ones:

Irrevocable Life Insurance Trust (ILIT):

An ILIT owns a life insurance policy on you (or you and your spouse). Life insurance payouts can be subject to estate tax if you own the policy at death. By moving the policy into an ILIT, the death benefit will not be counted in your estate. Upon your passing, the insurance proceeds go to the trust and then to your beneficiaries tax-free, often providing cash to pay any estate taxes due on other assets. This is a popular strategy to cover estate taxes or provide for heirs without increasing the taxable estate.

Qualified Personal Residence Trust (QPRT):

This special trust lets you gift your home to your heirs at a discounted value while you continue living in it for years. You put your primary house (or a vacation home) into a QPRT and reserve the right to live there rent-free for, say, 10–20 years. Because your heirs won’t take possession until the term ends, the home’s value for gift-tax purposes is deeply discounted (often by 20% or more). Bottom line: a QPRT removes a valuable home from your estate at a fraction of its market value, saving hundreds of thousands in estate tax. (If you outlive the QPRT term, you might pay your kids fair rent to keep using the home – which further reduces your estate and can be a win-win for tax planning.)

Dynasty Trusts (Generation-Skipping Trusts):

Ultra-wealthy families use “dynasty” trusts that can last for generations – sometimes up to 1,000 years! These trusts leverage the generation-skipping transfer (GST) tax exemption to pass wealth to grandchildren and beyond without additional estate tax at each generation. In a dynasty trust, your children can often access funds as beneficiaries, but the assets aren’t considered their estate when they die. This way, one big transfer can support multiple generations tax-free. If you have significant assets, a dynasty trust can avoid successive estate taxes and keep your family fortune intact over the long haul.

Charitable Trusts (CRT/CLT):

If you have charitable intentions, certain trusts let you support a charity and lower taxes. For example, a Charitable Remainder Trust (CRT) pays income to you (or heirs) for a term, then donates the remainder to charity. You get an immediate charitable deduction and reduce your taxable estate. A charitable lead trust (CLT) does the inverse – payments go to charity for a period, then the remainder to your heirs. These can significantly cut estate and gift taxes for philanthropically minded families (firstfinancial.is). Even simpler, naming a charity in your will for part of your estate can reduce the taxable estate dollar-for-dollar by the charitable amount.

Important: Irrevocable trusts must be set up properly to achieve the desired tax outcome. Once you put assets in an irrevocable trust, you generally cannot take them back, so work closely with an estate planning attorney to design trusts that fit your needs.

4. Use Family Limited Partnerships (FLPs) and Entity Freezes

If you own a family business, real estate holdings, or other investments, consider a Family Limited Partnership (FLP) or similar entity. An FLP allows you to transfer assets to family members at discounted values while retaining management control. Here’s how it works: you create a partnership (or LLC), and you, as the senior generation, keep a general partner stake (with control rights) and gift limited partner shares to your children or trusts for them. Because limited partners have restricted control and marketability, the value of those shares is often appraised much lower than a proportional share of the underlying assets (commonly 20–40% discounts).

In practice, this means you could give $1 million worth of assets but have it count as only ~$600,000 gift after valuation discounts. The assets – and all future appreciation on them – move out of your estate at a reduced value, thereby skirting estate tax on that growth. FLPs can also protect assets from creditors and ex-spouses, adding an asset protection benefit.

Similarly, tools like Grantor Retained Annuity Trusts (GRATs) can “freeze” the value of assets for estate purposes. You put, say, volatile or likely-to-grow assets into a GRAT, which pays you an annuity for a set term. At the end, any remaining value (e.g. growth in excess of a hurdle rate) passes to your heirs tax-free. GRATs are popular for passing on business equity or stocks – for instance, if a stock portfolio or company shares appreciate more than the IRS assumed rate, that excess goes to heirs with no estate or gift tax. This strategy was cited as one way many of America’s billionaires pass on fortunes tax-free.

Note: The IRS has specific rules and potential proposed changes for valuation discounts and GRATs. Work with qualified advisors to implement FLPs or GRATs in compliance with the latest regulations.

5. Make Charitable Donations (and Consider Donor-Advised Funds)

Charitable giving is a noble way to reduce estate taxes. Gifts to qualified charities are fully estate-tax deductible – they come out of your estate before tax is applied. If you plan to leave money to charity in your estate plan, those amounts won’t be subject to estate tax at all. For example, if a wealthy individual leaves 10% of their estate to charity, that portion is tax-exempt, potentially saving 40% of that gift in would-be taxes while supporting a good cause.

You don’t have to wait until death to benefit from charitable giving. Setting up a Donor-Advised Fund (DAF) is an easy, flexible option. A DAF lets you donate money or assets now (and get a current income tax deduction), while granting those funds to charities over time. The assets in the DAF grow outside your estate, reducing your taxable estate and future tax exposure. Many families use DAFs to involve their children in philanthropy, creating a legacy of giving while also cutting down the estate subject to tax.

If you have substantial charitable goals, you could combine strategies: for instance, give to charity up to the level that brings your estate under the tax exemption (so your heirs pay no tax), and direct the rest to family. This way every dollar either goes to your loved ones or a worthy cause – and nothing to the IRS.

(Tip: Always ensure your chosen charities meet IRS qualifications so that your gifts qualify for full tax deductions.)

6. Consider Changing Your Residency (State Estate Taxes)

As mentioned earlier, several U.S. states have their own estate or inheritance taxes with much lower exemption limits than the federal level. For instance, Illinois and Massachusetts start taxing estates around $1 million, and states like New York and Washington have state estate tax rates that can exceed 10–16%. If you reside in one of these states and have significant wealth, state estate tax could take a chunk on top of the federal tax.

One strategy is to establish residency in a state with no estate tax. Currently, most states (around 33) do not impose an estate tax. States like Florida, Texas, or Utah have neither estate nor inheritance taxes, making them attractive for retirees and high-net-worth individuals. If you have homes in multiple states, be very intentional about which state is your domicile for tax purposes. Changing residency might involve spending more than half the year in the no-tax state, moving your voter registration, driver’s license, and primary contacts there, etc. It’s a big decision, but for some families it can mean saving millions in state estate taxes.

Alternatively, if moving isn’t feasible, state-specific planning (like insurance trusts or carefully timed gifts) can mitigate state estate taxes. Consult with a local estate attorney since each state’s laws differ.

7. Buy Life Insurance to Cover Estate Taxes (Wealth Replacement)

Despite all the planning, some estates will still owe tax – especially if much of your wealth is illiquid (e.g. real estate or business equity). Life insurance can be a powerful safety net in these cases. By purchasing a life insurance policy sized to the estimated estate tax liability, you create a source of cash that your heirs can use to pay the tax bill without selling off assets. Essentially, you’re trading an uncertain, potentially large tax for a fixed insurance premium.

For this tactic to truly avoid adding to the estate tax burden, the policy should be owned outside your estate – typically via the Irrevocable Life Insurance Trust (ILIT) we discussed. With an ILIT-owned policy, the proceeds pass to your heirs completely tax-free. Your family can then use that money to pay any estate taxes due on your remaining estate, preventing a forced sale of a family business, home, or other assets. Many affluent families effectively pre-pay the estate tax at pennies on the dollar by using life insurance in this way. If you’re younger and healthy enough to get affordable coverage, it’s worth exploring as part of your estate plan.

(Note: If you already have a large policy in your name, talk to an advisor before transferring it to an ILIT – doing so incorrectly can trigger a 3-year look-back rule. New policies are easier to set up in a trust from the start.)

8. Plan for the 2026 Exemption Drop (Use It or Lose It)

With the current elevated exemption set to expire in 2026, there’s a “use it or lose it” aspect to today’s estate planning. The IRS has confirmed that individuals who take advantage of the $13+ million exemption now won’t be penalized if the exemption later drops (irs.govprivatebank.jpmorgan.com). This means you can gift substantial assets out of your estate now (in 2024–2025) to lock in the current high exemption.

For example, a wealthy couple with $30 million could gift $20+ million to trusts for their kids in 2025, using their combined $27.98M exemption (kiplinger.com). Those assets (and all future growth on them) would be out of the estate. In 2026, the couple’s remaining estate might be well under the new lower exemption, resulting in little to no estate tax owed at death. By contrast, if they procrastinated until 2026, that same $20M gift could trigger a large gift tax because the exemption might only be ~$14M for a couple.

In short: review your net worth now and anticipate the 2026 change. If you are anywhere close to the projected lower exemption (say $5–7M single, $10–14M couple), consider making larger gifts or other transfers before the law changes. This can shield those assets from future estate taxation under less favorable rules. Always work with experienced tax counsel when making multi-million dollar gifts to ensure you file the proper gift tax returns and allocate exemption correctly.

9. Keep Good Records and Revisit Your Plan Regularly

Estate tax planning isn’t a one-and-done deal. Laws change, asset values fluctuate, and family circumstances evolve. Make sure to update your estate plan regularly – especially if Congress passes new tax legislation or if you have major life events (marriage, divorce, a significant increase in wealth, etc.). What avoids estate tax under one law might need tweaking under another. For instance, if the exemption plunges in 2026, tactics like GRATs and charitable lead trusts could become even more valuable, whereas if the exemption is extended or made permanent, you might emphasize different strategies.

Also, keep thorough documentation of all your planning moves. If you made gifts, maintain records of appraisals and gift tax returns. For trusts or partnerships, ensure you follow all legal formalities (separate accounts, proper titling of assets, etc.). The IRS can and does scrutinize high-value estates, so meticulous records are your best defense to show that your tax-avoidance strategies are above board and comply with the law.

Finally, communicate with your heirs (as appropriate) about your plans. Surprises after death can lead to conflicts or mismanagement. By involving your family and professional advisors now, you’ll help ensure a smooth transfer of wealth with minimal tax and drama.