Nothing in this world is certain but death and taxes, Benjamin Franklin said. But even death can’t bring relief from taxes.
Yes, death can be a tax-triggering event. And there are two you should be aware of: the estate tax and inheritance tax.
The estate tax is levied on the things the deceased owns or has certain interests in when they die. The inheritance tax is paid by the heir.
The federal government has an estate tax only, but states can have one, both, or none, which can make death taxes even more confusing.
Most people probably won’t have to pay these taxes because thresholds are high. In 2019, for example, only 6,409 federal estate tax returns were filed. Of those, only about 40% were taxable but the revenue garnered was $13. 2 billion, IRS data show. However, the Congressional Budget Office expects that revenue “to increase sharply after 2025, when the amount exempt from estate tax is scheduled to drop” in half due to the expiration of the Tax Cuts and Jobs Act.
There are legal ways to minimize or even avoid these taxes. Are you worried that the government will take a big chunk of your hard-earned assets after you die? You’re not the only one. Estate taxes can take a big bite out of what you leave behind for your loved ones.
As someone who’s spent years helping folks with estate planning, I’ve seen firsthand how proper planning can save families thousands or even millions in unnecessary taxes. In this article, I’ll walk you through practical strategies to help shield your assets from estate taxes.
Understanding the Estate Tax in 2025
Before diving into avoidance strategies let’s clarify what we’re dealing with
The federal estate tax, sometimes called the “death tax,” only applies to estates worth more than the exemption amount. For 2025, that exemption is $13.99 million for individuals and $27.98 million for married couples.
That means if your estate is worth less than the exemption amount, you won’t owe any federal estate taxes. Good news, right? But here’s where things get tricky
- State-level estate taxes exist in about a dozen states with much lower exemptions (as low as $1 million in Oregon)
- Inheritance taxes apply in six states: Nebraska, Iowa, Kentucky, Pennsylvania, New Jersey, and Maryland
- Maryland is the only state with both estate and inheritance taxes (double whammy!)
Even if you’re not super wealthy, your home value, retirement accounts, investments, and life insurance can quickly push your estate over state exemption limits.
Strategy 1: Gift Assets During Your Lifetime
One of the simplest ways to avoid estate taxes is to reduce the size of your estate by giving away assets while you’re still alive.
In 2025, you can give up to $19,000 a year to each person or $38,000 a year to a married couple without having to pay gift taxes or using up your lifetime exemption. You can give gifts to as many people as you want every year.
For example, if you have 3 children and 6 grandchildren, you could potentially transfer $171,000 annually ($19,000 × 9 recipients) from your estate completely tax-free. Over 10 years, that’s $1.71 million removed from your taxable estate!
Additionally, payments made directly to educational institutions for tuition or to medical providers for healthcare expenses don’t count toward this annual gift limit. This is a fantastic way to help family members while reducing your estate.
Strategy 2: Create an Irrevocable Life Insurance Trust (ILIT)
Life insurance proceeds are generally income-tax-free for beneficiaries, but they’re still included in your taxable estate if you own the policy.
If you set up an irrevocable life insurance trust (ILIT) and give the trust ownership of your policy, the death benefits will not be taxed as part of your estate.
Here’s how it works:
- You establish an ILIT
- You transfer your existing policy to the trust or the trust purchases a new policy
- You make annual gifts to the trust to cover premium payments
- When you die, the insurance proceeds go to the trust and are distributed according to the trust terms
Setting up this plan at least three years before you die is best for it to work. If you die within three years of giving a policy to a trust, the IRS will still count the money from it as part of your taxable estate.
Strategy 3: Make Charitable Donations
If you’re charitably inclined, donating to qualifying organizations can reduce your estate while supporting causes you care about. There are several ways to do this:
Charitable Lead Trusts (CLTs)
A CLT pays income to a charity for a set period, after which the remaining assets go to your non-charitable beneficiaries (usually family members). This reduces the value of your estate and provides an immediate tax deduction.
Charitable Remainder Trusts (CRTs)
With a CRT, you transfer assets to an irrevocable trust, receive income from the trust for life or a term of years, and the remainder goes to charity upon your death. Benefits include:
- Immediate income tax deduction
- Avoiding capital gains on appreciated assets
- Reducing your taxable estate
For example, if you transfer stock that has significantly appreciated to a CRT, you can avoid capital gains tax that would apply if you sold it directly. Plus, you’ll get income for life and support your favorite charity.
Strategy 4: Establish a Family Limited Partnership
If you own a business or significant assets that you want to keep in the family, consider setting up a family limited partnership (FLP).
In this arrangement, you maintain control as the general partner while gradually transferring ownership interests to your children or other family members as limited partners. This achieves several goals:
- Keeps management control in your hands
- Gradually reduces your taxable estate
- Often provides valuation discounts for gift tax purposes
- Creates a structure for family wealth management
For instance, let’s say you transfer property worth $1 million to an FLP and then gift limited partnership interests to your children. Because limited partners lack control and marketability, these interests may be valued at less than their proportional share of the underlying assets—potentially at a 20-40% discount for gift tax purposes.
Strategy 5: Fund a Qualified Personal Residence Trust (QPRT)
Do you own a valuable home or vacation property? A QPRT allows you to transfer your residence to your beneficiaries at a reduced gift tax value while retaining the right to live in it for a specified term.
How it works:
- You transfer your home to an irrevocable trust
- You retain the right to live in the home for a specific term (e.g., 10 years)
- After the term ends, ownership passes to your beneficiaries
- The value of the gift is discounted because your beneficiaries must wait to take possession
The key benefit? The property’s value is “frozen” at the time of the transfer (minus the value of your retained interest), removing future appreciation from your taxable estate.
Warning: If you die before the trust term ends, the full value of the residence will be included in your estate. So this strategy works best if you have a good chance of outliving the trust term.
Strategy 6: Consider a Spousal Lifetime Access Trust (SLAT)
For married couples, a SLAT can be an excellent way to use your lifetime exemption while maintaining indirect access to the assets.
With this strategy:
- One spouse creates an irrevocable trust for the benefit of the other spouse
- The donor spouse makes a gift to the trust, using some or all of their lifetime exemption
- The beneficiary spouse can receive distributions from the trust
- The assets in the trust, including all future appreciation, are removed from the couple’s taxable estate
The beauty of a SLAT is that while the assets are technically removed from your estate, your spouse still has access to them if needed. This provides a safety net if financial circumstances change.
Bonus Strategy: Move to a State Without Estate Taxes
If you’re really serious about avoiding estate taxes and are willing to relocate, consider moving to a state without estate or inheritance taxes.
States with no estate or inheritance taxes include Florida, Texas, Nevada, and Wyoming. These states are popular retirement destinations for good reason!
Moving to a tax-friendly state can save your heirs hundreds of thousands of dollars, especially if you live in a state with a low exemption amount.
Essential Estate Planning Documents Everyone Needs
Regardless of your wealth level, these basic estate planning documents are crucial:
- Will – Names an executor and guardians for minor children, directs asset distribution
- Durable Power of Attorney – Designates someone to manage your finances if you become incapacitated
- Health Care Proxy – Appoints someone to make medical decisions for you if you can’t
- Living Will – Expresses your wishes regarding end-of-life care
- Revocable Living Trust – Can help avoid probate and provide for management of assets
When to Seek Professional Help
While some basic estate planning can be DIY, most tax avoidance strategies require professional guidance. Consider consulting with:
- An estate planning attorney
- A financial advisor with estate planning expertise
- A tax professional
The complexity of your situation determines the level of help you’ll need. If your estate approaches state or federal exemption levels, professional advice is essential.
Final Thoughts: Start Planning Now
The best time to begin estate planning was yesterday; the second best time is today. Estate tax laws change frequently, and strategies often take years to fully implement.
By taking action now, you can:
- Ensure your assets go to your chosen beneficiaries
- Minimize taxes and probate costs
- Protect your family from unnecessary financial and emotional stress
- Create a lasting legacy that reflects your values
Remember, estate planning isn’t just about avoiding taxes—it’s about taking care of the people and causes you care about most. Whether your estate is worth $500,000 or $50 million, thoughtful planning can make a tremendous difference to those you leave behind.
I hope these strategies help you protect the assets you’ve worked so hard to build. The peace of mind that comes from knowing you’ve done everything possible to preserve your legacy for future generations is truly priceless.
Have you started implementing any of these strategies? Or do you have questions about which approaches might work best for your situation? Everyone’s circumstances are unique, and there’s no one-size-fits-all solution when it comes to estate planning and tax avoidance.
Is there a federal inheritance tax?
No, there’s no federal inheritance tax so your inheritance doesn’t have to be reported to the IRS.
However, any gains from the estate between the time the person died and when the amount is distributed to you, will have to be reported and taxed on your personal tax return, said Brian Schultz, partner at certified public accounting firm Plante Moran.
Gains could include dividends from any stocks or bonds you may have inherited, for example.
Who levies an inheritance tax?
Only six states have an inheritance tax, but that will be cut to 5 next year as Iowa drops its tax.
Tax rates vary depending on the state but range between less than 1% to as high as 20% and usually apply to the amount above an exemption threshold. Rates depend on the size of your inheritance, state tax laws and your relationship with the deceased. Generally, the closer you are to the deceased, the less likely you’ll have to pay this tax. Spouses never have to pay inheritance tax, and close family members like children and parents often don’t have to pay it at all or pay a lower rate.
This year, these states have an inheritance tax:
How Do I Leave An Inheritance That Won’t Be Taxed?
FAQ
What is the best trust to avoid estate taxes?
Irrevocable life insurance trust – This type of trust (also called an ILIT) is often used to set aside funds for estate taxes.
Is there a loophole around inheritance tax?
Another common tax loophole is to downsize your property. An inheritance tax only applies when someone dies and takes into account assets that were given away in the seven years before death. This means that moving to a smaller home may be a good idea.
How much can you inherit from your parents without paying taxes?
While state laws differ for inheritance taxes, an inheritance must exceed a certain threshold to be considered taxable. For federal estate taxes as of 2024, if the total estate is under $13. 61 million for an individual or $27. 22 million for a married couple, there’s no need to worry about estate taxes.
What is the tax loophole for inherited property?
The stepped-up basis allows you to inherit the property at its fair market value at the time of the previous owner’s death rather than the original purchase price. This effectively eliminates any capital gains that occurred during the previous owner’s lifetime.