Many people do not have to worry about heirs paying taxes on their estate. This is because the federal exemption amount is currently $13.61 million, meaning that your estate must be valued above that for any estate taxes to apply. The exemption doubles to $27.22 million for a married couple.
This exemption is set to drop to $7 million per person in 2026, meaning many more people will have estates subject to federal estate taxes which can be as high as 40%. Congress may make the increased exemption permanent but until that happens here are some strategies to consider. Please note that states may also have their own rules related to estate taxes.
Non-Taxable Gifts
In 2025, you can gift up to $19,000 in cash or other assets to anyone free of taxes. This limit is per recipient, so you could gift this amount to any individual every year without tax consequence. Two married people can gift up to $38,000 per year per person as long as they file a gift tax return and elect gift-splitting.
This money is removed from your estate and, as long as you stay under the gift limit every year, is exempt from estate taxes. Any gifts given over the exemption amount will reduce your estate tax exemption so for large estates, giving over the gift exemption amount may not be a good strategy.
This strategy can be used alone or in combination with others to reduce the amount of your estate subject to taxes. As with all of these strategies, be sure you do not need the money for your own quality of life before gifting it away.
Revocable Trust
A revocable trust can direct how you want your assets dispersed upon your death. If you are married, your spouse can inherit an unlimited amount of assets without federal estate taxes. Whatever your marital status, your trust document can be used in conjunction with an irrevocable trust or through charitable donations to move assets out of your estate.
Any assets donated from your estate to a qualified charity will be excluded for estate tax calculations. If your estate is close to the exemption limit, designating donations in your revocable trust can eliminate estate tax entirely. A revocable trust can be changed or dissolved during your lifetime, providing flexibility as your goals and estate law change.
Irrevocable Trust
An irrevocable trust can be used to remove assets from your estate on the date the irrevocable trust is funded while also providing some protection from the beneficiary’s creditors or from poor decisions. Once funded, it is very difficult to remove the assets from the trust so be sure this will benefit you. An irrevocable trust can be created and funded during your life or can be created upon your death by stipulating so in your will or revocable trust.
You can fund an irrevocable trust by contributing up to the amount of the gift tax exemption every year. This may not make a large difference to your estate unless you begin this process many years before your death. This approach requires the use of something called a ‘Crummey letter’ so having an attorney involved is important.
You can also elect to use some or all of your estate exemption well before your death by transferring this amount into an irrevocable trust. This removes any future growth of these assets from your estate, potentially saving your heirs higher estate taxes. This also locks in your exemption at the current year, even if the exemption is reduced in the year of your death. If you use the exemption up, your other assets will be included in your estate and they will most likely be subject to estate taxes.
Irrevocable trusts are more complex than revocable trusts and can be used to accomplish a number of goals. It is important to know all of the rules of your irrevocable trust and weigh the potential downsides against the benefits. They often need ongoing professional administration which comes at a cost.
Donor-Advised Fund
A donor-advised fund can be used to donate cash and securities to charity over a number of years. Any money you contribute is eligible for an income tax deduction in the year contributed within IRS limitations whether or not you distribute it to charities right away. You are able to change the charities which receive these funds but you are not able to withdraw the funds for your own use once contributed.
Funds in a donor-advised fund are not included in your estate for federal tax purposes. You can designate an heir to continue to run the donor-advised fund after your death to determine when to distribute the funds to charity. This vehicle works especially well for gifts of highly appreciated stock.
Life Insurance
Generally, life insurance death benefits are not taxable as income to the recipient. The death benefit is included in your estate so a life insurance policy may be subject to estate taxes. However, you can purchase life insurance within an Irrevocable Life Insurance Trust (ILIT) to remove the proceeds from your estate. The death benefit from the life insurance policy could instead provide liquidity to pay estate taxes for a large illiquid estate.
An ILIT is a type of irrevocable trust which requires ongoing administration and someone aside from yourself to serve as trustee, which can be expensive and complicated.
By combining these strategies, you can reduce your estate’s taxable value, protect assets, and ensure a smoother transfer of wealth to your beneficiaries, all while aligning your estate planning with your broader financial and philanthropic goals. Careful planning and consultation with an estate planner or tax professional can help you determine the most appropriate tools to achieve your objectives. Call your advisor team at American Money Management to discuss your estate plan.