Estate Tax: What is it and will it affect you?
Estate Tax: What is it and will it affect you?
In essence, your estate is the totality of everything you own (investments, real estate, retirement account, personal property, etc). As if you haven’t paid enough taxes throughout your lifetime, the federal government can take one last crack at taxing you, after you’re gone. They do this through federal estate tax.
The good news? The vast majority of people won’t be affected by this tax, because the exemption amount is so high. However, there is always the possibility that exemption could be reduced by congress at a later date. So, if your estate is worth more than the exemption amount, or if you think that it may be above the exemption amount at some point in the future, it’s useful to know some strategies to reduce or eliminate exposure to this tax.
The estate tax exemption in similar in concept to the standard deduction for income tax. Basically, the government is saying they’ll leave you alone until you get to a certain threshold, after which they want their piece of the pie. Currently, as of 2025, the federal estate tax exemption amount is $13.99 million per individual (or $27.98 million per married couple).
It is set to increase to $15 million per individual, or $30 million per married couple in 2026. It also has no sunset in place. But again, the exemption could be changed by congress in the future.
With that in mind, let’s discuss some legal strategies to reduce your estate size.
Marital Deduction
Also called the unlimited marital deduction because it is exactly that, unlimited. It allows spouses to transfer an unlimited amount of assets to each other, free of estate and gift taxes. This defers taxation until the death of the second spouse.
However, to avoid wasting one spouse’s exemption, a Bypass Trust is often used to keep certain assets out of the surviving spouse’s estate, but they can still benefit from the Trust while they are alive.
Charitable Deduction
If you’d prefer to give your money to a charity that does work you care about rather than the IRS, consider a donation to a qualitied charity. Whatever portion of your estate is left to a qualified charitable organization, that portion is not subject to estate tax. Charitable giving can be structured in several tax-efficient ways, including:
Outright Bequests
Charitable Remainder Trusts (CRTs)
Donor-Advised Funds
Portability
Simply put, Portability lets the surviving spouse use any exemption amount that was unused by the deceased spouse when they passed.
Portability is not automatic and must be filed within a certain timeframe. Make sure to keep up with current laws and regulations to ensure it is filed correctly and on time.
Advanced Tools for Estate Tax Avoidance
Irrevocable Life Insurance Trusts (ILITs)
An ILIT owns a life insurance policy outside of your taxable estate. Upon death, the death benefit is paid to the trust—estate tax-free—and can be used to provide liquidity or pass wealth to heirs.
Grantor Retained Annuity Trusts (GRATs)
A GRAT allows you to transfer assets that are expected to appreciate, while retaining an annuity for a set term. Any appreciation beyond a modest IRS-set rate passes to heirs gift-tax free.
Family Limited Partnerships (FLPs
FLPs consolidate family assets, allowing for valuation discounts when interests are transferred to heirs, reducing the estate’s value for tax purposes.
Spousal Lifetime Access Trusts (SLATs)
SLATs allow one spouse to create a trust for the benefit of the other, removing assets from the estate while still providing indirect access to the funds during life.
The above strategies can be complex and must be done correctly to be effective. Seek the guidance of a professional to see which might be the right fit for you.
Although all the above can be ways of reducing federal estate tax, don’t forget that each state has its own estate or inheritance tax rules as well. Stay informed, stay diligent, and start developing a strategy.
Main Takeaways:
Estate tax laws are complex and always changing. Whether you’re well below the exemption or potentially exposed to millions in tax, strategic planning can make a substantial difference. Working with an experienced financial advisor, estate attorney, and/or tax professional can help you design a plan that minimizes taxes and ensure your money goes where you want it to go.
Interested in learning how these strategies could apply to your unique situation?
Contact me today for a confidential estate planning review.
Ryan Page, CFP®, MBA®
Office & Text:720-826-1092
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