Top 5 Strategies for Minimizing Estate Taxes and Maximizing Inheritance

It’s not enough to just grow your assets to pass them down to future generations; you also need to keep them safe from estate taxes that could eat away at them. If you don’t plan ahead, a lot of the money you worked hard to earn could go to federal and state estate taxes, probate fees, and other costs. You can legally lower your estate tax bill, make it easier to pass on your assets, and leave your loved ones with the most money possible by using proactive estate tax planning strategies. This guide will show you the five best ways to lower estate taxes and boost your inheritance. It will also give you helpful advice, examples from real life, and steps that are easy to follow.

1. Starting

Think about how sad it would be to save millions of dollars for your kids and then have a lot of it go away in taxes and fees before they even see it. At the federal level, estate taxes, also called “death taxes,” can take up to 40% of an estate’s value. At the state level, they can take even more. What is the good news? With careful estate planning, a lot of families can legally lower or even get rid of estate taxes. That means that the next generation will get more money without it being broken up.

When you die, estate taxes are based on the total value of everything you own, like your house, your retirement accounts, your business interests, and your personal property, minus any debts and costs. People whose estates are worth more than the federal exemption (currently $12.92 million per person as of 2023) may have to pay federal estate tax. Many states also have their own estate or inheritance taxes with much lower limits. This means that everyone, from rich people to small business owners to people who just want to protect their homes, needs to carefully plan their taxes.

Planning ahead not only helps your heirs keep more of your estate, but it also:

• Reduces stress and fights. Beneficiaries can agree on things better when there are clear plans.
• Makes things more fluid. Life insurance and other plans make sure that there is money to pay taxes without having to sell things.
• Makes Legacy Better. Philanthropic strategies let you help charities and save money on your taxes at the same time.

This article will show you the five best ways to plan your estate taxes so that you can leave as much money as possible to your heirs and pay as little as possible.

• Take advantage of the Lifetime Gift Tax Exemption
• Set up trusts to keep your money safe and pay less in taxes
• Take advantage of the marital and portability exemptions
• Use life insurance to plan your estate.
• Donating to charity to lower the taxable estate

No matter how much your estate is worth, these tips will help you make a good plan for it. It will protect your legacy for generations to come, even when laws change.

2. The Basics of Estate Taxes and Their Effects

Let’s go over the basics of estate taxes and why they matter before we get into the details.

What Are Estate Taxes, and How Do You Figure Them Out?

When you die, an estate tax is a tax on the transfer of your property. The IRS figures out the tax based on the “gross estate” value:

• All of your money
• Property
• Accounts for banks and investments
• Interests in business
• Accounts for retirement (withdrawals are taxed as income)
• Things like cars, jewelry, and collectibles that are personal

Deductions

• Loans and mortgages that haven’t been paid off
• The cost of the funeral
• Donations to charity
• Costs of running the business, like lawyers and appraisers

Different rates apply to the net amount after deductions. For example, amounts over the exemption limit are taxed at up to 40% federally.

Estate Taxes in the State vs. the Federal Government

• The federal estate tax. This only applies to estates worth more than the federal exemption, which is $12.92 million per person in 2023. Married couples can protect up to $25.84 million by using portability (see Strategy #3).
• Tax on estates and inheritances in the state. More than 15 states have estate or inheritance taxes. The lowest amount that can be taxed is $1 million. There are many different rates and rules. For instance, Maryland and Oregon charge estate taxes, while Pennsylvania and Nebraska charge inheritance taxes, which the beneficiaries pay, not the estate.

Exemptions and Limits

• Not having to pay the yearly gift tax. You can give each person up to $17,000 every year without using up your lifetime exemption.
• No tax on gifts for life. The same amount as the federal estate tax exemption: $12.92 million in 2023. Gifts that are more than the yearly limit lower your lifetime exemption.
• Deduction for getting married. You can give money to a spouse who is a U.S. citizen without limits, and they won’t have to pay taxes on it.
• Tax Break for Giving to Charity. You can take the full value of gifts to qualified charities off your gross estate.

Taxes on Estates and Wills

The court is in charge of the probate process, which makes sure that a will is valid, pays off debts, and divides up assets. Long probate can make taxes worse because it costs more in legal fees and makes it harder to get to assets. Probate is easier, costs less, and beneficiaries get their assets faster with a strategic plan that includes wills, trusts, and lifetime gifts.

Why It’s Important to Plan Ahead

The laws about estate taxes change all the time. If you wait until the end of your life to pay your taxes, your heirs may have to sell things at bad times to get money. By lowering estate taxes ahead of time, you can protect your legacy and keep your loved ones from having to deal with extra money and emotional stress.

3. Plan #1: Take Advantage of the Lifetime Gift Tax Exemption

One of the best ways to get ready for your estate taxes is to use the lifetime gift tax exemption. If you move assets out of your taxable estate while you’re still alive, you may owe less estate tax.

How the Lifetime Gift Tax Exemption Works

• The amount of the exemption for life. Right now (2023), it’s $12.92 million per person. This lifetime limit includes any gifts that are more than the annual exclusion, which is $17,000 per recipient.
• The Gift Tax Return, IRS Form 709. You need to keep very careful track of all your gifts if you give more than the annual exclusion.

What Are the Benefits of Giving for Life?

• Shrinks the estate. When you die, gifts you gave while you were alive are no longer part of your estate.
• Possible Growth Outside of the Estate. Giving away assets early can help the person who gets them become more valuable, which means you won’t have to pay estate tax on them later.
• Protection for the Annual Exclusion. Every year, you and your spouse can each give $17,000 to each recipient, which is $34,000 to each child, grandchild, or loved one. This won’t change your lifetime exemption.

How to Give Gifts That Work

• Gifts that don’t count as income every year. Give kids, grandkids, or trusts for minors money, stocks, or other things on a regular basis.
• Payments for school and medical care are made directly. There is no limit to how much money you can give directly to schools or hospitals on behalf of someone else. These payments do not count against the annual exclusion or lifetime exemption.
• Presents for Graduates. Give away things that will go up in value, like stocks, early so that their value will go up outside of your estate. Giving someone a $50,000 stock position now that could grow to $200,000 in ten years, for example, keeps the whole future gain out of your estate.

Giving to Grandkids is an example.

Mrs. Rivera, who is 75 years old, has a lot of money in stocks and bonds. Every year, she gives $17,000 to each of her two children and $17,000 to each of her five grandchildren. By the time she turns 80, she will have given away $1.19 million tax-free, which is $34,000 times 7 people times 5 years. She has also taken away all future value from those assets in her estate.

The Good and Bad Things About Giving Gifts for Life

Helpful Advice for Giving Gifts for Life

• Keep an eye on things. When you need to, fill out Form 709 and keep track of all your gifts.
• Use trusts that are Crummey. Set up a Crummey trust if you want to give a child a big gift. This way, the beneficiaries can get the annual exclusion and the assets will be safe.
• Get your family to help you. Be sure that the people who get the gifts know how to keep track of them for tax reasons.
• Get in touch with a tax expert. For complicated gifting strategies like sales to grantor trusts, you need to get help from a professional.

You can legally lower the amount of estate taxes you have to pay by using the lifetime gift tax exemption. This will help you reduce your estate, pass on wealth sooner, and give younger generations more power.

4. Plan #2: Set Up Trusts to Protect Your Money and Lower Your Taxes.

Trusts are a key part of any full plan for paying estate taxes. They let you control, change, and protect your assets. You can take a lot of money out of your taxable estate and choose when and how your heirs will get their inheritance.

Different Types of Trusts to Help You Plan Your Estate Taxes

• A living trust that can be changed
  • Lets you stay in charge even after you die.
  • Property that is in a trust does not have to go through probate, but it is still part of your taxable estate, so you won’t save any money on taxes.
• Trusts that can’t be changed
  • Assets are taken out of your estate after they are funded.
  • Can’t be easily changed or canceled, which protects creditors and lowers taxes.
• Trust for Bypass (Credit Shelter)
  • The spouses put money into the trust up to the federal limit. The surviving spouse gets money but not full control.
  • Makes sure that each spouse uses their exemption to the fullest, which keeps assets safe for good.
• Qualified Personal Residence Trust (QPRT)
  • Lets your heirs get the value of your home or vacation property at a lower gift tax rate.
  • You can live in the house for a certain amount of time, and then your heirs get the rest.
• Grantor Retained Annuity Trust (GRAT)
  • You give your money to a trust and get payments for a set amount of time.
  • The rest goes to the people who will benefit. If the asset’s value rises faster than the IRS’s assumption rate, that extra value isn’t taxed as part of the estate.

How Trusts Remove Things from Your Estate

When set up and funded correctly, irrevocable trusts make sure that assets are no longer subject to estate tax. For example:

• A QPRT could give away a $1 million home for $600,000 in gift tax value, according to IRS discount rates. The last $400,000 of growth goes to the beneficiaries without them having to pay estate tax when the trust term ends.
• A Bypass Trust can hold an extra $12.92 million for married couples, and they won’t have to pay federal estate tax on it.

The Real World Benefits of the QPRT

Mr. Lee is 72 years old and owns a home worth $2 million. He creates a QPRT that lasts for ten years. The IRS says that the gift tax value of the rest of the interest is $1 million. After ten years, Mr. Lee’s kids will own the house. If the property goes up to $3 million during the loan, the whole $3 million is not part of his estate. This could save him hundreds of thousands of dollars in estate taxes.

How to Work with Lawyers Who Help with Estate Planning

• The rules are hard to follow. Trusts like GRATs and QPRTs need very precise calculations, IRS rate assumptions, and strict deadlines for funding.
• Customization. A lawyer can help you write trust language that meets your needs, like keeping your assets safe from creditors or deciding when to give them out.
• Help you get money. It’s very important to move titles and accounts into the trust the right way because mistakes can make tax breaks go away.

Useful Tips for Planning a Trust

• Write down what you own and how much of it you have. Then, decide which types of trusts are best for each type of asset (cash, stocks, real estate).
• Think about state income tax: Some states tax trusts in different ways, so make plans accordingly.
• Stagger Trusts: Set up a few GRATS or QPRTs at different times so you can get tax breaks over time.
• Check Your Trusts Every Once in a While: The IRS changes its discount rates and exemption limits, so make sure your trusts are still working.

Setting up trusts for estate planning gives you more control over how your wealth is passed on, takes a lot of value out of your estate, and lets you use advanced strategies to lower estate taxes while maximizing inheritance for your heirs.

5. Strategy #3: Take Advantage of the Marriage and Portability Exemptions.

The unlimited marital deduction and the idea of portability are two great ways for married couples to get even more estate tax breaks. In 2023, this could keep a married couple’s money safe up to $25.84 million.

Deduction for Costs of Marriage

• What It Is: When a spouse who is a U.S. citizen dies, all of their assets are fully deductible for estate tax purposes.
• Benefit: The surviving spouse gets to keep the whole estate of the first spouse, no matter how big it is.

Exemptions That Can Be Moved Around but Aren’t Used

• Definition: The surviving spouse can add the deceased spouse’s unused federal exemption to their own.
• How it works: To choose portability, the executor of the first spouse’s estate must file IRS Form 706 (the estate tax return) within nine months of the death. They can get an extra six months to do this.
• Result: The surviving spouse gets the other $7.92 million if the first spouse only uses $5 million of their $12.92 million exemption. This is like “porting” it forward.

Advice for Married Couples

• Only the Portability Method
  • Use portability to make planning your estate easier.
  • Pros: It’s not expensive and doesn’t need a lot of paperwork (just Form 706).
  • Cons: There was no trust set up to protect assets, and the law could change the rules for portability.
• Credit Shelter (Bypass) Trust that can be moved
  • Set up a bypass trust with the first spouse’s exemption amount. This trust will grow tax-free outside of both estates.
  • Pick portability for any exemption that isn’t used.
  • Pros: It protects your assets and lets you use the most exemptions.
  • Cons: It costs more and is harder to understand.

A Few Examples

• For portability only: Mr. and Mrs. Patel each have estates worth $8 million. Mr. Patel dies first, and his estate uses $8 million of the exemption, leaving $4.92 million that it doesn’t use. By filling out Form 706, Mrs. Patel can protect an extra $4.92 million. This makes her total $17.84 million.
• Bypass Trust + Portability: When Mr. Patel died, the Patels had $12.92 million in a bypass trust. The other $2.92 million goes straight to Mrs. Patel. They chose portability on the $2.92 million, which means that Mrs. Patel’s estate is worth $15.84 million.

Helpful Tips for Marriage Plans

• File a Form 706 on time: Portability needs an estate tax return on time, even if you don’t owe any taxes.
• Look up the laws in your state: Some states don’t accept federal portability, so you might need to use state-level estate planning tools.
• Get help from professionals: Ask your estate planning lawyer if a bypass trust, portability, or both are the best ways to reach your goals.

Using marital and portability exemptions makes sure that a married couple can keep the highest possible estate tax exemption, which protects up to twice the individual amount. This also gives the surviving spouse protection and freedom.

6. Use Life Insurance Policies to Help You Plan Your Estate as Strategy #4.

Life insurance is a great way to plan your estate, not just to make up for lost income. When set up right, life insurance gives you money to pay estate taxes, stops other assets from being sold, and makes sure that beneficiaries get the most money possible.

Why You Should Get Life Insurance

• Liquidity at Death: Estate taxes and other costs usually have to be paid right away. If heirs don’t have any money, they might have to sell stocks or property for less than they are worth.
• Guaranteed Payout: The people who get life insurance benefits usually don’t have to pay taxes on them, so they can be sure to get the money they need.

“ILIT” Stands for “Irrevocable Life Insurance Trust.”

An ILIT is a special kind of trust that keeps your life insurance policy safe so that the death benefit doesn’t go to your taxable estate.

• What It Does:
  • You create an ILIT and either give it ownership of an existing policy or put money into a new policy that is part of the trust.
  • The ILIT is now the policy owner and the person who gets the money.
  • The money goes to the ILIT when you die, not your estate. This keeps them from having to pay estate taxes.
• Good things:
  • Keeps the money from the policy from going to your estate.
  • Makes structured payments to beneficiaries, like payments based on age.
  • Protects money from creditors or beneficiaries who make bad financial decisions.

For Example, Using Insurance to Pay for Estate Taxes

The Martinez family owns a mansion that is worth millions of dollars. If they don’t plan ahead, they will have to pay a $1 million estate tax bill. They didn’t sell part of the family farm; instead, they put $1 million into an ILIT policy. When someone dies, the ILIT gets the money, pays the estate taxes, and gives the rest of the money to the heirs. This keeps the farm safe.

Helpful Tips for Insurance Plans

• Pick the Right Policy: Depending on how much it costs, how long you need it, and how much cash value it has, you can choose between term, whole life, or universal life.
• Trust Funding: To avoid paying the annual gift tax, make sure that your gift to the ILIT for premium payments meets IRS “Crummey” notice requirements.
• Check the Beneficiary Designations: Make sure that the policy owner is listed correctly as your estate or ILIT.
• Talk to your insurance, tax, and legal advisors to make sure that your policy design fits in with your overall estate plan.

You can get the money you need to pay estate taxes without losing value on other assets by using life insurance and ILIT structures. This will give your heirs the biggest inheritance possible.

7. Strategy #5: Give Money to Charity to Lower the Value of Your Estate.

Donating to charity can help you reach your charitable goals and pay less in estate taxes at the same time. You can take gifts to qualified charities off of your gross estate, which lowers the amount of money that is taxed.

Gifts That Last a Lifetime Versus Gifts That Are Given in a Will

• Gifts to charity that will last a lifetime:
  • Gifts made directly or through charitable remainder trusts (CRTs) lower estate tax right away.
  • You get money from CRTs for the rest of your life, and the rest goes to charity.
• Gifts to charity in a will:
  • Bequests in your will or trust lower the estate tax when you die.
  • If you write it correctly, you might be able to get an unlimited charitable deduction.

Charitable Remainder Trust (CRT)

A CRT can turn things that have gone up a lot in value into a stream of income for the rest of your life. It also lowers estate taxes and puts off paying capital gains tax.

• How It Works:
  • You put things like stocks into a CRT.
  • The trust sells the assets and gives you money for life (or a set number of years) without having to pay taxes.
  • After you die or the term ends, the rest goes to the charity of your choice.
• Good points:
  • The present value of the remainder interest can be taken off of estate and income taxes right away.
  • Spreading out concentrated positions without having to pay capital gains tax.
  • A charitable legacy that fits with how you want to give.

Donor-Advised Funds (DAFs)

DAFs make it easy and flexible to give to charity:

• How it works:
  • You give money or property to a DAF at a public charity.
  • Get a tax break right away.
  • Over time, tell the fund to give money to your favorite charities.
• Good points:
  • A quick tax break for the estate.
  • Setting up and running is easier than with private foundations.
  • The ability to let family members help you decide how to use grants.

The Smith Family Foundation Is a Great Example.

The Smiths had a $5 million portfolio with stocks that had gone up a lot in value. They made a CRT and put $2 million worth of stock into it. The CRT sold the stock without having to pay taxes on it, which gave them money to buy more stocks. They got a yearly income for life, and the rest—about $1.5 million—went to the medical research charity of their choice. This made their estate less taxable and left a lasting legacy for charity.

Giving to Charity: Some Helpful Tips

• Set Charitable Goals: Decide what you want to do with your money and pick charities that share your values.
• Get the Right Valuation: Get qualified appraisals for non-cash gifts to show how much you can deduct.
• Make sure your will or trust clearly says CRTs, DAFs, or bequests so that they work with your estate plan.
• Get Professional Help: To make the most of your deductions and stay in compliance, work with tax professionals and people who know a lot about charitable planning.

There are two benefits to including charitable giving in your estate plan: it helps important causes and lowers the amount of money you have to pay taxes on. This is good for both your legacy and your heirs.

8. More Advice: Keep Your Estate Plans Up to Date and Get Help from Experts.

If you don’t use your estate tax plans for years, they might not work. Follow these important maintenance tips to keep your plan working:

Check Your Plan Often and Make Changes When You Need To.

• Things that got things going:
  • Marriages, divorces, births, and deaths
  • A lot of changes in the value of assets or the way a portfolio is made up
  • Changes in tax laws and how much you can save
• How often:
  • At least once every three to five years or after something big happens in your life.

Take Care of a Group of Advisors

• A lawyer who specializes in estate planning writes and updates wills, trusts, and other legal documents.
• Tax Advisor/CPA: Watches for changes in tax laws, figures out how much you owe in estate and gift taxes, and finds ways to lower your tax bill.
• Financial Planner: Makes sure that your plans for investing are in line with your goals for your estate and your cash flow needs.
• Insurance Specialist: Makes life insurance plans that cover estate taxes and give the most benefits.

Keep Good Records.

• List of Assets: deeds to property, bank statements, and papers that show you own a business.
• Trust Funding Documentation: Papers that show how money was moved into trusts, who the beneficiaries are, and tax returns for gifts.
• Insurance Policies: Copies of policies, trust papers, and schedules for paying premiums.

Talk to the Heirs

• Family meetings: Talk about the big goals and how things are set up, but don’t give away too much personal information.
• Letters of Instruction: These are not legally binding and tell your advisors what your values are, what you want to happen when you die, and how to get in touch with them.
• Digital Vaults: Store digital copies of important papers in a safe, easy-to-reach place for your family and executor.

You can make sure that your estate plan keeps lowering estate taxes and raising inheritance over time by being proactive and working with a team of professionals who are all on the same page.

9. Mistakes People Make About Estate Taxes

Misunderstandings about estate taxes can make even the best-laid plans go wrong. Let’s get a few things straight:

Myth 1: “Estate Taxes Are Only for the Very Rich.”

• The truth is that state estate taxes have low thresholds (usually between $1 and $3 million), and high property values can trigger a tax even if federal exposure is unlikely.

Myth 2: “A Simple Will Can Help You Avoid Estate Taxes.”

• Truth: A will alone does not lower estate taxes. You need to use gifts, trusts, and other ways to get value out of your taxable estate.

Myth 3: “Giving Always Lowers Estate Taxes.”

• Truth: Gifts that are more than the annual exclusion use up your lifetime exemption. If you give away too many gifts, you could lose your exemption and have to pay gift taxes.

Myth 4: “The Marital Deduction Makes Everything Better for Married Couples.”

• The truth is that the unlimited marital deduction puts off estate tax until the survivor dies. However, couples may still have to pay a lot of taxes on the survivor’s estate if they don’t have portability or bypass trusts.

Myth 5: “Giving to Charity Isn’t Worth It Because It’s Too Hard.”

• Truth: Donor-advised funds and other tools make it easier to plan for charity because they let you choose when to give and give you immediate deductions. You don’t need a private foundation to do this.

Knowing the difference between fact and fiction helps you make a good plan. Get help from a professional to handle tough situations and stay away from common mistakes.

10. In the End

Estate taxes can take a lot of money away from what you want to leave behind. But you can lower your estate taxes a lot and increase your beneficiaries’ inheritance by using smart, proactive strategies like the lifetime gift tax exemption, setting up targeted trusts, using marital and portability exemptions, using life insurance structures, and making charitable donations.

Things to Keep in Mind:

• Lifetime Gifting: Give your heirs assets now to lock in tax savings and possible appreciation benefits for them.
• Trust Structures: Use irrevocable trusts, QPRTs, GRATs, and bypass trusts to keep your assets safe from estate tax and decide how they will be shared.
• Marital & Portability: Married couples can protect up to twice the amount of the individual exemption. They should fill out Form 706 on time and look into credit-shelter trusts.
• Life Insurance and ILITs: Make sure you have enough money to pay your taxes without having to sell your things, and keep your death benefits out of your taxable estate.
• Charitable Planning: Use CRTs, DAFs, and testamentary bequests to lower your gross estate and help causes you care about at the same time.

It’s important to review your plans often and work with a group of experienced advisors because estate and tax laws change. To find out how much estate tax you owe right now, make a list of your assets, talk to your CPA or estate planning lawyer, and ask about the strategies listed here. You can protect your family’s money from unnecessary taxes, save more for future generations, and leave a legacy that shows what you believe in and want to achieve if you act now.

Call to Action:

Get in touch with a qualified estate planning professional or tax advisor to schedule an estate tax planning review. The sooner you start, the more chances you’ll have to change your plan, take advantage of tax breaks, and make the most of your inheritance. This will make sure that the money you’ve worked hard to earn goes to the people and causes that matter to you.

Ideas for How to Look:

• Chart: The maximum amounts and rates for federal and state estate tax breaks
• Flow chart: The steps to getting a gift tax exemption for one year or for the rest of your life
• Table: A look at how different kinds of trusts change the amount of estate taxes you have to pay
• A list of things you can do to lower your estate tax

You can confidently deal with the problems of estate taxes and make sure that your loved ones have a better financial future with these tips for planning your estate tax.