Estate Tax Planning Strategies: How to Reduce What Your Estate Owes

Most people will never pay federal estate tax — the exemption is high enough that only the wealthiest estates are affected. But with the exemption scheduled to drop in 2026, more families should be thinking about this. Here's what the estate tax is and the most effective legal strategies for reducing it.

The 2025 Sunset: A Planning Window

The Tax Cuts and Jobs Act of 2017 roughly doubled the federal estate tax exemption — from about $5.5 million to $11 million per person (now $13.61 million in 2024 with inflation adjustments). This elevated exemption is scheduled to expire ("sunset") after December 31, 2025, reverting to approximately $7 million per person.

For estates between $7 million and $13.6 million per person, this matters: assets above $7 million could be subject to a 40% estate tax after 2025 if no planning is done. The good news: gifts made now, at the higher exemption, won't be "clawed back" if the exemption decreases — locked in gifts remain locked in.

Strategy 1: Annual Exclusion Gifting

Every individual can give up to $18,000 per recipient per year (2024) without gift tax or exemption impact. A married couple can give $36,000 per recipient. Over years, this systematically reduces the estate:

A couple with three adult children giving $36,000/year per child moves $108,000 out of the estate annually
Add in spouses of children, grandchildren, and others — the annual gifting capacity grows significantly
No filing required for gifts within the annual exclusion

Strategy 2: Irrevocable Trusts

Several trust structures permanently remove assets from the taxable estate:

ILIT (Irrevocable Life Insurance Trust): Keeps life insurance proceeds out of the estate
SLAT (Spousal Lifetime Access Trust): Removes assets while preserving access through a spouse
GRAT (Grantor Retained Annuity Trust): Passes asset growth above the IRS hurdle rate to heirs estate-tax-free
Qualified Opportunity Zone investments: Capital gains deferred and estate inclusion potentially reduced

Strategy 3: Charitable Giving

Charitable bequests and lifetime charitable gifts reduce the taxable estate dollar-for-dollar. Charitable Remainder Trusts (CRTs) and Charitable Lead Trusts (CLTs) can accomplish both income and estate tax planning goals simultaneously.

Strategy 4: Portability

A surviving spouse can claim any unused portion of the deceased spouse's exemption by filing a Form 706 estate tax return within 5 years of the death. Even if no estate tax is owed, filing to preserve portability may be worth the cost, particularly if the surviving spouse's estate might eventually exceed the exemption.

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Frequently Asked Questions

What is the estate tax and who has to pay it?

The federal estate tax is a tax on the transfer of wealth at death. The tax applies only to estates above the federal exemption amount — currently $13.61 million per individual ($27.22 million for married couples using portability) as of 2024. The top tax rate is 40%. Because the exemption is so high, the vast majority of estates in the United States pay no federal estate tax — only about 0.1–0.2% of estates are subject to it. However, the current exemption is scheduled under the Tax Cuts and Jobs Act to revert to approximately $7 million per person (inflation-adjusted) after December 31, 2025 — which would subject significantly more estates to the tax. Additionally, about 17 states plus the District of Columbia have their own estate or inheritance taxes with lower exemptions (some as low as $1 million), meaning state-level estate tax can apply to moderately-sized estates in high-tax states. Whether federal or state estate tax is a concern depends entirely on the size of your estate and where you live. If your estate is below the applicable exemptions, estate tax planning strategies are not your priority.

What are the most effective ways to reduce estate taxes?

The most commonly used estate tax reduction strategies: (1) Annual gifting — you can give up to $18,000 per person per year (2024 figure, indexed for inflation) without gift tax consequences and without reducing your lifetime exemption. A married couple can give $36,000 per recipient per year. Systematic annual gifting over decades can move substantial wealth out of the estate; (2) Utilizing the lifetime exemption — you can give up to $13.61 million (2024) during your lifetime without gift tax; gifts above the annual exclusion reduce your remaining estate tax exemption; (3) Irrevocable trusts — various trust structures remove assets from the taxable estate: Irrevocable Life Insurance Trusts (ILITs) keep life insurance death benefits out of the estate; Spousal Lifetime Access Trusts (SLATs) move assets while preserving indirect family access; Grantor Retained Annuity Trusts (GRATs) pass asset growth to heirs estate-tax-free; (4) Charitable giving — charitable bequests reduce the taxable estate (assets left to charity are fully deductible); (5) The marital deduction — transfers between spouses are fully exempt from estate tax (the "unlimited marital deduction"), which allows deferral of estate tax until the second spouse's death; (6) Portability — a surviving spouse can use any unused portion of the deceased spouse's exemption, effectively doubling the couple's combined exemption if a portability election is filed.

What should people do before the 2025 estate tax exemption sunset?

The estate tax exemption is scheduled to roughly halve after December 31, 2025 — from approximately $13.6 million to approximately $7 million per person. This creates both a planning opportunity and a deadline for estates currently below the full exemption but above the post-2025 level. Key considerations: (1) If your estate is between $7–$14 million, taking action before 2026 could allow you to lock in larger gifts or trust transfers at the higher exemption — wealth moved out of the estate before the sunset is not recaptured if the exemption drops; (2) Trust planning (ILITs, SLATs, GRATs) can be implemented before the sunset to remove assets from the estate at current values; (3) Maximizing annual exclusion gifting now is low-risk and reduces the estate regardless of what happens to exemption levels; (4) Political uncertainty — the exemption sunset may or may not occur depending on Congressional action before 2026. Planning should account for both scenarios; don't make irrevocable decisions based solely on anticipated legislative changes; (5) Work with an estate planning attorney who specializes in estate tax — this is a complex area and the right strategy depends entirely on your specific situation, family structure, and asset mix.