Estate Planning and Taxes

The federal estate tax applies to the total value of assets transferred at death that exceed the exemption threshold. The tax rate on the excess reaches 40%. Because the exemption is high, only about 0.2% of estates owed federal estate tax in recent years.

Filing Status	2025 Exemption	Top Rate
Individual	$13,990,000	40%
Married couple (portability)	$27,980,000	40%

Portability lets a surviving spouse inherit the deceased spouse's unused exemption by filing a timely estate tax return (Form 706), even if no tax is owed. The Tax Cuts and Jobs Act (TCJA) doubled exemptions in 2017; without new legislation, exemptions revert to roughly $7 million per person (inflation-adjusted) in 2026.

Warning: The 2026 exemption sunset could affect estates that seem well under the current threshold. Begin planning now if your estate is above $7 million.

When an asset is inherited, its cost basis is stepped up (or occasionally stepped down) to its fair market value on the date of death. This eliminates the capital gains tax on all appreciation that occurred during the decedent's lifetime.

• Example: You paid $50,000 for stock now worth $500,000. If you sell it, you owe capital gains on $450,000. If you hold it until death, your heir inherits it with a $500,000 basis — zero taxable gain.
• Community property states offer a full step-up on both halves of community property, not just the decedent's share — a significant advantage over common-law states.
• Assets held in a traditional IRA or 401(k) do NOT receive a step-up in basis; heirs pay ordinary income tax on withdrawals.

Tip: Highly appreciated assets are often best held until death rather than gifted during life, because gifting transfers your original (carryover) basis to the recipient.

Trusts are legal entities that hold assets according to instructions set by the grantor. The key estate-tax distinction is whether the trust is revocable or irrevocable.

Feature	Revocable Trust	Irrevocable Trust
Removes assets from estate	No	Yes
Grantor can change or dissolve	Yes	Generally no
Avoids probate	Yes	Yes
Asset protection from creditors	No	Yes (if structured correctly)
Common types	Living trust	ILIT, SLAT, GRAT, QPR Trust

An Irrevocable Life Insurance Trust (ILIT) removes life insurance proceeds from the taxable estate. A Spousal Lifetime Access Trust (SLAT) allows one spouse to gift assets to an irrevocable trust while the other spouse retains access to distributions.

Systematic gifting during life is one of the most effective estate tax reduction tools. Every dollar removed from your estate today also removes all future appreciation on that dollar.

• Annual exclusion gifts: $19,000 per recipient in 2025 ($38,000 with gift splitting). A couple with 4 children and 8 grandchildren can move $456,000 out of the estate per year with zero tax.
• Grantor Retained Annuity Trust (GRAT): Transfer appreciating assets into a trust; receive annuity payments back; excess growth passes to heirs tax-free.
• 529 superfunding: Front-load 5 years of contributions ($190,000 per beneficiary for a couple) immediately.
• Charitable Remainder Trust (CRT): Donate appreciated assets, receive an income stream, and reduce the taxable estate while generating a charitable deduction.

Tip: Gifts of interests in family limited partnerships (FLPs) or LLCs can be valued at a discount (typically 20–35%) for gift tax purposes, amplifying the amount you can transfer per dollar of annual exclusion.

Twelve states and the District of Columbia impose their own estate or inheritance taxes, often with exemptions far lower than the federal level. Some states also have inheritance taxes, which are paid by the heir rather than the estate.

State	Tax Type	Exemption (approx.)	Top Rate
Massachusetts	Estate	$2,000,000	16%
Oregon	Estate	$1,000,000	16%
Maryland	Estate + Inheritance	$5,000,000 estate	16% / 10%
Pennsylvania	Inheritance only	None	15% (non-relatives)
Washington	Estate	$2,193,000	20%

Changing your state of domicile to a state with no estate or inheritance tax (e.g., Florida, Texas, Nevada) is a legitimate and often significant planning move for large estates. Proper domicile establishment requires more than owning a home — you must change voter registration, driver's license, and primary residence.