How Much of Your Estate Could Go to Taxes — and What You Can Do About It
Estate tax planning is the process of legally arranging your assets so that more of your wealth passes to your family — and less goes to the government.
Here’s a quick snapshot of what you need to know right now:
| Key Fact | 2025 | 2026 |
|---|---|---|
| Federal exemption (individual) | $13.99 million | $15 million |
| Federal exemption (married couple) | $27.98 million | $30 million |
| Top federal estate tax rate | 40% | 40% |
| Annual gift exclusion (per recipient) | $19,000 | $19,000 |
| Exemption if law sunsets (est.) | — | ~$6.2 million |
The core strategies to minimize estate taxes include:
- Annual gifting — transfer up to $19,000 per person, per year, tax-free
- Irrevocable trusts — remove assets from your taxable estate permanently
- Charitable giving — reduce your taxable estate while supporting causes you care about
- Life insurance trusts — cover estate tax bills without selling family assets
- Valuation discounts — reduce the taxable value of business interests or real estate
If you’re an executor or family member dealing with a loved one’s estate, the words “estate tax” can feel like a gut punch on top of an already painful situation. You’re grieving. You’re sorting through paperwork. And now someone’s telling you the IRS might take up to 40 cents of every dollar above the exemption threshold.
The good news? Most estates don’t owe any federal estate tax at all. The current exemption is generous — nearly $14 million per person in 2025. But that could change dramatically as soon as 2026, when the exemption may drop by more than half if Congress doesn’t act.
And even if your estate falls below the federal threshold, more than a dozen states have their own estate or inheritance taxes — with exemptions as low as $1 million in places like Oregon. Rising home values and retirement accounts mean more families are getting caught off guard than ever before.
The families who come out ahead aren’t necessarily the wealthiest ones. They’re the ones who planned ahead.
Simple guide to estate tax planning:
Federal Estate Tax Basics and the 2026 Sunset
When we talk about the federal estate tax, we are essentially talking about a “transfer tax.” It is a tax on your right to transfer property at the time of your death. To calculate it, the IRS looks at your “gross estate,” which includes everything you own: cash, securities, real estate, insurance proceeds, trusts, annuities, and business interests.
Once you subtract allowable deductions—like mortgages, debts, and administration expenses—you arrive at your taxable estate. If that number exceeds the federal exemption, the portion above the limit is taxed at a staggering 40% rate.
The Looming Sunset Provision
Currently, we are living in an era of historically high exemptions thanks to the Tax Cuts and Jobs Act (TCJA). For 2025, the exemption is $13.99 million per individual. In 2026, it is scheduled to rise to $15 million. However, there is a catch: these high limits are part of a “sunset provision.”
Unless Congress passes new legislation, the exemption is scheduled to “sunset” on December 31, 2025. On January 1, 2026, the exemption could drop back to roughly $6.2 million per individual (adjusted for inflation). This means estates that are currently “safe” from federal taxes could suddenly find themselves owing millions to the IRS.
Portability: A Lifeline for Surviving Spouses
One of the most important tools in estate tax planning is the “portability election.” This allows a surviving spouse to “port” or take the unused portion of their deceased spouse’s exemption. For example, if a husband dies in 2025 and uses none of his $13.99 million exemption, the wife can add his $13.99 million to her own, effectively protecting nearly $28 million from federal taxes.
However, this isn’t automatic! The executor must file a timely federal estate tax return (Form 706) to elect portability, even if no tax is currently due. Failing to do this can be a multi-million dollar mistake. To better understand how your total assets are viewed by the IRS, check out our guide on Understanding the Estate: What It Means for Your Legacy.
Strategic Gifting and Estate Tax Planning
One of the simplest ways to shrink your taxable estate is to give your money away while you’re still here to see your loved ones enjoy it. The IRS allows you to make certain gifts without ever touching your lifetime exemption.
| Gifting Method | 2025/2026 Limit | Tax Impact |
|---|---|---|
| Annual Exclusion | $19,000 per recipient | Tax-free; no reporting required |
| Gift Splitting (Couples) | $38,000 per recipient | Tax-free; requires Form 709 |
| Direct Medical/Tuition | Unlimited | Tax-free if paid directly to provider |
| 529 Plan Superfunding | $95,000 (5-year lump sum) | Uses 5 years of annual exclusions at once |
Education and Retirement: 529 Plans and SECURE 2.0
For families looking to help the next generation, 529 college savings plans offer a unique “superfunding” rule. You can contribute five years’ worth of annual gifts in a single year ($95,000 in 2026). This removes the money (and all its future growth) from your taxable estate immediately.
Recent changes under SECURE 2.0 have made these plans even more attractive. Now, up to $35,000 of unused 529 funds can be rolled over into a Roth IRA for the beneficiary, provided the account has been open for 15 years. This provides a “safety valve” if your child doesn’t use all the money for school.
Upstream Gifting and the “Step-Up” in Basis
A more advanced strategy involves “upstream gifting.” This is when a person in a high-tax bracket gifts assets to an older family member (like a parent or grandparent) who has a smaller estate. When that older family member passes away, the assets receive a “step-up in basis” to their current fair market value. If the older relative leaves those assets back to the original donor’s children, the family effectively wipes out years of capital gains taxes while utilizing the older relative’s unused estate tax exemption.
For those serving in the military, there are specific legal services available to help navigate these complexities. You can find more details on estate planning for military families to see how these rules apply to your service.
Leveraging the Annual Exclusion for Estate Tax Planning
The annual exclusion is your best friend. In 2026, you can give $19,000 to as many people as you want. If you and your spouse have three children and six grandchildren, you could collectively move $342,000 out of your estate every single year ($38,000 x 9 recipients) without paying a dime in gift tax or using any of your lifetime exemption.
Just remember: if you go even one dollar over the $19,000 limit to a single person, you must file IRS Form 709. You won’t necessarily owe tax, but that extra dollar will start chipping away at your $15 million lifetime exemption.
Advanced Trust and Valuation Strategies
For estates that exceed the exemption limits, simple gifting might not be enough. This is where we look at “irrevocable” structures. Unlike a revocable living trust, which you control and can change at any time, an irrevocable trust generally cannot be modified once it’s created. In exchange for giving up control, the IRS treats those assets as if you no longer own them—meaning they aren’t taxed when you die.
Common Advanced Trust Strategies
- Grantor Retained Annuity Trusts (GRATs): You place assets into a trust for a set number of years and receive an annuity payment back. If the assets grow faster than the IRS “hurdle rate,” the excess growth passes to your heirs entirely tax-free.
- Spousal Lifetime Access Trusts (SLATs): One spouse creates a trust for the benefit of the other. This uses up your current high exemption before the 2026 sunset, but your spouse can still access the funds if needed.
- Qualified Personal Residence Trusts (QPRTs): You transfer your home to a trust but keep the right to live in it for a term of years. This “freezes” the value of the home for tax purposes, which is a huge win in markets with rapidly rising real estate values.
- Dynasty Trusts: These are designed to last for generations—sometimes forever in states like Texas or Arizona that have favorable “Rule Against Perpetuities” laws. They protect assets from estate taxes, creditors, and even divorce for your children and grandchildren.
Valuation Discounts and Family Limited Partnerships (FLPs)
If you own a family business or a large portfolio of real estate, you might use a Family Limited Partnership or an LLC. When you gift “non-controlling” interests in these entities to your children, those gifts are often eligible for valuation discounts.
Because a minority owner can’t force a sale or control the company, the IRS allows you to discount the value of that gift—often by 25% to 35%. This means you could move $1,000,000 worth of assets out of your estate but only “use up” $700,000 of your exemption. It’s like getting a 30% discount on your taxes. However, these structures must be handled carefully to avoid a Breach of Trust.
How do irrevocable trusts assist in estate tax planning?
The primary goal of an irrevocable trust is asset removal. By moving assets into the trust, you “freeze” their value. Any future appreciation happens inside the trust, outside the reach of the 40% estate tax.
To make this work, many trusts use “Crummey powers.” These are short-term windows where beneficiaries can withdraw contributions. This technicality allows the money you put into the trust to qualify for the annual $19,000 gift exclusion. Managing these trusts requires a high level of expertise, which is where a trust administration lawyer becomes essential.
Charitable Giving, Liquidity, and State Taxes
Philanthropy isn’t just good for the soul; it’s excellent for estate tax planning. Every dollar you leave to a qualified charity is a dollar the IRS cannot tax.
DAFs and CRTs
- Donor Advised Funds (DAFs): You get an immediate income tax deduction when you fund the account, and the assets grow tax-free. You can then recommend grants to your favorite charities over time.
- Charitable Remainder Trusts (CRTs): These are “split-interest” trusts. You (or your heirs) receive an income stream for a set period, and the “remainder” goes to a charity. This can help you avoid capital gains taxes on highly appreciated assets while reducing your taxable estate.
The Problem of Liquidity
One of the biggest tragedies in estate law is when a family is forced to sell a beloved family business or farm just to pay the estate tax bill. The IRS generally requires the tax to be paid in cash within nine months of death.
To prevent this, we often use Irrevocable Life Insurance Trusts (ILITs). The trust owns a life insurance policy on your life. When you pass away, the death benefit is paid to the trust tax-free. The trustee can then use that cash to pay the estate taxes, keeping the family business intact.
Other options include Section 6166 deferrals, which allow certain business owners to pay the tax over 10 to 15 years, or Graegin loans, which are private loans taken by the estate where the interest is immediately deductible for estate tax purposes.
Don’t Forget the States!
While we focus on the federal government, your state might want a piece of the pie too. Some states have “inheritance taxes” (taxed based on who receives the money) or “estate taxes” (taxed on the total value). In Oregon, for example, the exemption is only $1 million. If you own a home in a state with a low threshold, you might need a Trust vs Probate analysis to see how to best protect your assets from local taxes.
Frequently Asked Questions
What is the federal estate tax and how is it calculated?
The federal estate tax is a tax on the transfer of your property at death. It is calculated by taking your Gross Estate (fair market value of all assets) and subtracting Deductions (debts, funeral costs, administrative fees, and transfers to a surviving spouse or charity). The remaining “Taxable Estate” is then compared to your available exemption. Anything over the exemption is taxed at a flat 40%.
What happens to the exemption after the 2026 sunset?
Under the current Tax Cuts and Jobs Act, the exemption is high ($13.99M+). However, this law expires at the end of 2025. Without new action from Congress, the exemption is expected to drop back to approximately $6.2 million per person in 2026. This “cliff” is why many families are rushing to gift assets or set up trusts now, while the higher limits still apply.
Why is a will important for smaller estates?
Even if you don’t owe estate taxes, you still need a plan. Without a will, your assets are distributed according to “intestate succession” laws—which might not be what you wanted. Furthermore, a comprehensive plan includes beneficiary designations (which override your will) and powers of attorney for healthcare and finances. Proper planning and asset titling can help your family avoid the “living probate” of a court-supervised guardianship if you become incapacitated.
Conclusion
At National Probate Partners, we know that estate tax planning can feel overwhelming. Whether you are in Scottsdale, Arizona, or Corpus Christi, Texas, the goal is the same: to protect your legacy and ensure your hard work benefits your family rather than the government.
From managing complex Texas probate law to providing nationwide estate administration, we are here to help you navigate the “Uncle Sam” problem. Don’t wait for the 2026 sunset to catch you off guard. Whether you’re dealing with a simple will or a complex multi-state estate that requires Ancillary Probate, our team offers the compassionate, personalized service you deserve.
Let’s make sure your wealth stays where it belongs—with the people you love. Reach out to us today to start your journey toward a tax-efficient legacy.