If you’re thinking about how to preserve more of your wealth for the people and causes you care about, creating an estate plan that minimizes taxes is an essential step. It’s not just for the ultra-wealthy. Even a modest estate can face unnecessary taxes and administrative headaches without proper planning.
In this blog, I’ll walk you through the basics of tax-efficient estate planning. We’ll cover what an estate plan includes, which taxes might apply, and how strategies like trusts and lifetime gifting can help reduce your tax burden.
Why estate planning matters for taxes
When you pass away, your assets may be subject to several taxes at the federal and state level. Without a plan, your estate could lose significant value to taxes and probate costs.
Estate planning is about control. It allows you to determine who receives what, when, and how. When done strategically, it can reduce the amount of taxes owed.
Understand which taxes could apply
Here are some of the key taxes to consider:
- Federal estate tax : Unless Congress acts, the federal estate tax exemption is expected to fall from $13.99 million per person ($27.98 million for a couple) to approximately $7 million in 2025. This could expose many more estates to taxation at rates up to 40%.
- State estate and inheritance taxes : Some states impose their own estate or inheritance taxes with lower exemptions than the federal threshold. Even if you live in a state with no estate tax, owning property in another state could trigger a tax there.
- Capital gains tax : While not an estate tax, capital gains taxes apply when heirs sell inherited assets. Understanding how the step-up in basis works is critical.
- Income taxes on retirement accounts : If your estate includes IRAs or other retirement accounts, your heirs could face income taxes when they withdraw those funds.
Start with the basics
The cornerstone of any estate plan is a will. This document will spell out who should receive your assets, name guardians for minor children, and designate an executor. Without one, your estate will be settled according to state law, not your wishes.
Equally important are your beneficiary designations on retirement accounts, life insurance policies, and other payable-on-death accounts. These assets bypass the will and go directly to the named beneficiaries.
If your designations are out of date or conflict with your will, it can create legal and tax complications.
Use trusts
Trusts are a versatile estate planning tool. Here are a few ways they can help minimize taxes:
- Revocable living trusts : A revocable living trust is a legal entity created during your lifetime that allows you to hold and manage your assets. The primary benefit of this type of trust is its ability to help avoid probate, the legal process that validates a will and oversees the distribution of assets after death.Since property in a revocable living trust doesn’t go through probate, it can lead to lower administrative costs and faster distribution of assets to beneficiaries. It also offers privacy because the trust’s contents do not become public records, unlike a will. However, because the trust can be altered or revoked at any time by the grantor, the assets within it are still considered part of the grantor’s estate for tax purposes don’t reduce taxes directly
- Irrevocable life insurance trusts (ILITs) : ILITs are specialized trusts designed to hold life insurance policies outside of the insured’s taxable estate. When a life insurance policy is owned by an individual, the death benefit becomes part of their estate upon passing, which may subject it to estate taxes. By transferring ownership of the policy to an ILIT, the proceeds can be kept out of the taxable estate
- Grantor retained annuity trusts (GRATs) : GRATs are estate planning tools designed to minimize gift and estate taxes when transferring appreciating assets to heirs.
- Charitable remainder trusts (CRTs): CRTs are a valuable financial tool that can provide several benefits, both for the donor and the charitable organizations they wish to support. They allow you to support a charitable cause while receiving income and reducing estate and capital gains taxes.
Each type of trust has distinct advantages. The right strategy depends on your specific goals and asset mix.
Make lifetime gifts strategically
Giving assets away during your lifetime can reduce the size of your taxable estate. In 2025, the annual gift tax exclusion is $19,000 per recipient. Gifts under this amount don’t require filing a gift tax return.
Larger gifts can use part of your lifetime exemption. Making those gifts sooner rather than later could help take advantage of the current high exemption levels before they’re reduced.
Other effective tax-smart options include gifts to 529 college savings plans, charitable donations, and direct payments for tuition or medical expenses.
Work with professionals
Estate planning intersects with law, finance, and tax policy. That’s why collaboration among your estate attorney, CPA, and financial advisor is critical. A coordinated approach helps ensure nothing slips through the cracks.
If you’re not sure where to begin, start with a conversation. We can help you identify your goals, review your current documents and beneficiary designations, and design a plan that fits your life.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual. All investing involves risk, including loss of principal. No strategy ensures success or protects against loss.