How to Avoid Estate Tax

If your net worth exceeds $11.5 million as an individual or $23 million as a couple with a living trust, it may be time to start considering strategies to help minimize potential estate taxes.

If you have $10 million or more in investable liquid assets, exploring comprehensive retirement financial planning and estate planning strategies can be an important next step.

If your net worth has been well beyond $11.5 million as an individual or $23 million as a couple for some time, it may be important to act now to help prevent a significant portion of your estate from being subject to taxes. Your financial picture, life goals, priorities, and lifestyle needs often differ from the broader population, particularly when managing high levels of wealth.

Additionally, if you reside in a state that imposes its own estate tax, you may already exceed its exemption thresholds, which currently range between $5 million and $6 million.

In the next section, we’ll outline ten estate planning strategies commonly used by high-net-worth and ultra-high-net-worth families to help reduce potential estate tax burdens. Before that, let’s first review what the estate tax is and how it operates.

Estate Tax Changes for High-Net-Worth Individuals

The 2017 changes to the tax system significantly increased the amount individuals can pass on to their heirs without triggering federal estate taxes. Combined with various tax planning strategies, this allows many high-net-worth individuals to reduce the overall estate taxes their heirs may be required to pay.

The 4 Main Types of Taxes on Inheritance

What is estate tax?

Estate tax is a federal tax imposed on the total value of everything you own or have certain interests in at the time of your passing. The valuation is based on the fair market value of assets, which may differ from their original purchase price. The sum of these items is known as your “gross estate.”

Estate tax operates as a progressive tax, similar to income tax. The rate depends on the size of the estate and can range from 18% to 40% (see table below). Most estates are not subject to federal estate tax, as estates valued under $13,610,000 in 2024 are generally exempt.

In addition to the federal estate tax, certain states impose their own estate taxes. These states include Connecticut, the District of Columbia, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont, and Washington—each with its own exemption limits and rates.

2024 Federal Estate Tax Rates

Federal Estate Tax Rates

Taxable Amount	Estate Tax Rate	What You Pay
$1 – $10,000	18%	– 18% on taxable amount
$10,000 – $20,000	20%	– $1,800 plus 20% of the amount over $10,000
$20,000 – $40,000	22%	– $3,800 plus 22% of the amount over $20,000
$40,000 – $60,000	24%	– $8,200 plus 24% of the amount over $40,000
$60,000 – $80,000	26%	– $13,000 plus 26% of the amount over $60,000
$80,000 – $100,000	28%	– $18,200 plus 28% of the amount over $80,000
$100,000 – $150,000	30%	– $23,800 plus 30% of the amount over $100,000
$150,000 – $250,000	32%	– $38,800 plus 32% of the amount over $150,000
$250,001 – $500,000	34%	– $70,800 plus 34% of the amount over $250,000
$500,001 – $750,000	37%	– $155,800 plus 37% of the amount over $500,000
$750,001 – $1 million	39%	– $248,300 plus 39% of the amount over $750,000
$1 million+	40%	– $345,800 plus 40% of the amount over $1 million

Source: SmartAsset – All About the Estate Tax

What’s Inheritance Tax?

Inheritance tax is a tax imposed on a beneficiary who receives an inheritance gift. There is no federal inheritance tax in the United States. Only a few states impose an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Iowa’s inheritance tax is scheduled to be phased out by 2025. Maryland is unique because it levies both an estate tax and an inheritance tax. Each state has its own exclusions, and inheritance tax rates generally range between 6% and 10%.

Capital Gains Tax

Capital gains tax applies when an asset is sold for a higher price than its purchase price. It is levied on the profit from the sale of assets such as stocks, real estate, artwork, and insurance policies. A capital gains tax may also apply to inherited assets if the beneficiary sells them.

The capital gains tax rate is based on the individual’s income and can range from 0% to 20%. Factors such as the individual’s tax bracket, the length of time the asset was held before sale, and any tax strategies used can affect the final tax amount. Certain exemptions may apply, such as exemptions for eligible investments held for a specified period.

Income Tax

Inherited assets are not considered taxable income. However, income tax may apply if the inherited asset was held in an account funded with pre-tax contributions. Withdrawals from such accounts are generally taxed as ordinary income. On the other hand, rolling over inherited funds into another eligible pre-tax account can allow the beneficiary to defer taxes until distributions are taken.

10 Ways to Help Minimize Estate Taxes

1. Buy Life Insurance and Use the Benefit to Cover Potential Taxes
2. Move to a State without Estate Taxes
3. Give Financial Gifts During Your Lifetime
4. Establish an Irrevocable Life Insurance Trust (ILIT)
5. Create a Charitable Trust
6. Set Up a Donor-Advised Fund
7. Form a Family Limited Partnership or a Foundation
8. Invest in a Business and Transfer Ownership to Heirs
9. Spend Assets or Gift Them Strategically
10. For Married Couples – Maximize the Double Exemption Amount

Each of these strategies can help manage or reduce potential estate tax exposure.

High-net-worth and ultra-high-net-worth individuals with substantial estates may find that, without proper planning, a significant portion of their assets could be subject to taxation. Implementing a combination of these strategies can help preserve more of your wealth for future generations.

The following sections will explore each option in more detail, providing insights into how thoughtful planning can impact estate outcomes.

1. Buy Life Insurance and Use the Benefit to Help Cover Potential Taxes

For clarification, this content is for informational purposes only — we do not sell life insurance.

This strategy is most effective when implemented early. The basic idea is simple: purchase life insurance now to secure a death benefit that can help cover a significant portion of the estate taxes that may be owed.

Doing so can allow your heirs to pay any taxes due without needing to deplete their inheritance. In many cases, the cost of the insurance is lower than the potential estate tax liability. This method does not eliminate estate taxes, but it can help ensure liquidity for your beneficiaries when the time comes.

Keep in mind that this is one tool among many when considering comprehensive estate planning.

2. Move to a State without Estate Taxes

It’s important to remember that estate taxes can exist at both the federal and state levels. Several states impose their own estate taxes, as mentioned earlier.

If you currently reside in a state that charges estate taxes, one way to potentially reduce your estate tax burden is to relocate to a state that does not impose one. However, if you own multiple properties, carefully consider your residency status. Attempts to shift residency can sometimes be challenged, and courts often scrutinize such moves closely.

Proper planning and a clear understanding of residency requirements are crucial to help avoid unexpected taxation.

3. Give Money to People While You Still Can

One approach to reducing your taxable estate is to gift assets to loved ones or to causes that are meaningful to you during your lifetime. By giving assets away now, the value of your taxable estate can be reduced, which may help lower future estate tax obligations.

For example, if your estate is currently valued at $15 million and you anticipate minimal changes in value, strategic gifting can help manage your estate size. Under current tax rules, you may gift up to $15,000 per person per year — or $30,000 per person if you are married — without triggering federal gift taxes. These annual exclusion gifts do not count against your lifetime estate and gift tax exemption.

If sufficient assets are gifted over time, it may be possible to reduce the estate below the taxable exemption threshold. However, this strategy may be less effective for ultra-high-net-worth estates that significantly exceed exemption limits.

For individuals considering gifting as part of their estate planning, consulting with a qualified estate planning professional can help ensure the approach aligns with personal goals and current tax laws.

4. Set Up an ILIT, an Irrevocable Life Insurance Trust

An Irrevocable Life Insurance Trust (ILIT) is designed to help prevent life insurance proceeds from being included in your taxable estate, which could otherwise increase estate tax liability.

For example, imagine a family with a $50 million estate, and each spouse holds a $10 million life insurance policy. If the surviving spouse is named the direct beneficiary, the $10 million benefit would increase the estate’s value to $60 million, potentially increasing the taxable portion of the estate.

An ILIT restructures life insurance ownership, helping to keep the death benefit outside of the estate and reducing potential estate tax exposure. Establishing an ILIT requires careful planning and legal documentation to ensure compliance with IRS rules.

5. How to Help Minimize Estate Taxes with a Charitable Trust

There are two main types of charitable trusts: charitable remainder trusts and charitable lead trusts.

Both types work by assigning portions of your estate, which can include hard assets, investments, or cash, as charitable donations. By transferring ownership of these assets to a trust, their value is removed from your taxable estate.

For example, if you own a business property, you could assign it to a charitable trust. When the property is sold, the proceeds remain within the trust, helping to reduce the overall value of your estate.

Setting up a charitable trust is a complex process that typically involves collaboration with a tax accountant, an estate attorney, and a financial planner. Proper structuring is essential to ensure the trust achieves its intended legal and tax objectives.

Individuals considering charitable trusts as part of their estate planning strategy are encouraged to seek qualified professional advice tailored to their specific needs.

6. Set Up a Donor-Advised Fund

A Donor-Advised Fund (DAF) operates similarly to a health savings account, but for charitable purposes. It is a dedicated investment account where assets can grow tax-free, with the intention of eventually supporting charitable causes.

Unlike certain types of trusts, a DAF allows you to maintain advisory privileges over how and when the funds are distributed to eligible charities. After your passing, your heirs may continue managing the fund based on your original charitable goals.

Once assets are contributed to a DAF, they are removed from the value of your taxable estate. This strategy can assist with managing estate tax exposure while also potentially offering an income tax deduction in the year the contribution is made.

7. Set Up a Family Limited Partnership or a Foundation

Another approach to managing potential estate taxes involves creating a Family Limited Partnership (FLP) or establishing a private foundation.

A private foundation typically focuses on charitable giving and remains under your control during your lifetime. You can direct funds toward causes important to you, such as education, medical research, environmental projects, the arts, or other philanthropic goals.

A Family Limited Partnership, although more complex, allows you to manage investments while protecting assets from potential claims by creditors or other parties not directly related to the family. In this structure, you maintain management control during your lifetime, but ownership interests are gradually transferred to “limited partners,” typically your heirs.

When structured properly, a Family Limited Partnership can offer tax advantages related to income, estate, gift, and potentially real estate taxes. Your heirs may benefit from lower valuation rates on transferred assets, which can significantly impact tax outcomes.

Due to the complexity of establishing either a Family Limited Partnership or a private foundation, working closely with qualified estate planning professionals is highly recommended.

8. Invest in a Business Such that Your Heirs Become Part-Owners

In certain cases, investing in a business venture and arranging for your heirs to become part-owners can be a strategy for managing estate value.

For example, if you have a friend or associate starting a business and seeking capital, you might structure an investment that provides your heirs with an ownership stake. Over time, they may benefit from profits generated by the business.

While this approach carries more risk compared to traditional estate planning strategies, it can provide opportunities for heirs to build equity outside of your personal estate. For individuals familiar with business startups and comfortable with entrepreneurial investments, this may offer another option for managing estate tax exposure.

9. Spend It or Give It Away

Another straightforward way to reduce the size of your taxable estate is to either increase personal spending or make charitable donations during your lifetime.

You can donate unlimited amounts to qualified charities, which may reduce your estate’s value and potentially provide income tax benefits in the year of the donation. Gifting properties and other assets to family members during your lifetime can also lower the overall value of your estate, subject to applicable gift tax rules.

Additionally, increasing personal spending—such as traveling, enjoying new experiences, or investing in personal interests—can naturally reduce the assets subject to future estate taxes.

While simple, these actions can be an effective part of an overall estate planning strategy.

10. Married Couples – Double Your Exemption Amount

This is the final strategy in this overview of approaches to managing potential estate taxes.

In addition to having a comprehensive estate plan, married couples may want to consider establishing a living trust. Within a living trust, you can specify that your estate be divided between both spouses. When the first spouse passes away, their portion of the estate can utilize their available estate tax exemption. Later, when the second spouse passes away, their portion of the estate can use the exemption available at that time.

It is also important to carefully consider how primary residence and other major assets are incorporated into your estate planning strategy.

For example, in a hypothetical estate valued at $20 million, a living trust could assign $10 million to each spouse. Upon the first spouse’s death, their $10 million could be covered by their estate tax exemption (e.g., $11.58 million, based on exemption limits applicable at the time of death). The estate plan would then direct the distribution of those assets.

When the second spouse later passes, the exemption available at that time could similarly apply to their portion of the estate. This coordinated approach between spouses can play an important role in effective estate tax planning.

The Best Way to Avoid Estate Tax

If the total value of your estate adds up to more than the exemption limit, you will pay estate taxes on everything above that limit.

As of 2020, the federal exemption limit sits at $11.58 million per estate, and it will climb with inflation until 2025. If Congress does nothing before then (and that is their specialty, right?), the exemption will revert to its previous level, down around $5.49 million.

As you do not know when your death will happen, the best way to fight the estate tax and, in particular, the federal estate tax, would be for people to plan ahead personally.

Calculating your tax liability starts with calculating the value of the estate by including gifts and then subtracting debts. There is more to claim for your estate than just the cash in bank accounts, investments or retirement assets. It encompasses your investment property, business real estate properties, boats and art objects as well as non-cash assets.

This is the very point where trouble starts. Assuming that your estate is worth $20 million, of which you have a reportable amount of $18 million in real property, rental property, a business involving six cars directly or as personal goodwill, together with some art. That leaves only $3 million in liquid assets to pay estate tax with, so you can only benefit from learning how to avoid estate tax.

Thus, your heirs may be forced to quickly sell assets — sometimes at a discount — in order to pay the estate tax. In some cases, this could mean selling part of a business, real estate, or other investments. Estate taxes are typically due within a set timeframe, and extensions are difficult to obtain, making advance planning essential to help protect your beneficiaries from unnecessary financial pressure.

Where does the $3 million figure come from? The federal estate tax exemption as of 2020 is $11.58 million. Estate tax rates start at 18% but escalate rapidly, reaching 40% for amounts over $1 million beyond the exemption. For example, if your estate is valued at $20 million, the first $11.58 million would be exempt. The next $1 million, from $11.58 million to $12.58 million, would be taxed at rates that amount to approximately $345,800. The remaining $7.42 million would then be taxed at 40%, resulting in about $2.968 million in taxes. Adding these together, the total estimated estate tax owed would be approximately $3.3138 million.

Understanding these calculations underscores why proactive estate planning is important for high-net-worth individuals. Planning ahead can help ensure your heirs are prepared and that your assets are preserved as much as possible.

For more details on federal estate tax calculations and to review estate tax rates and exemptions for states that impose an estate tax, consulting professional resources can provide further clarity.

How to Help Minimize Inheritance Tax

What is inheritance tax?

Inheritance tax applies only at the state level. It is a tax paid by beneficiaries on money or assets they inherit, although certain close relatives may be exempt depending on individual state laws. Only a few states impose inheritance tax — Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.

At the federal level, up to $12.6 million in assets can be passed on before the estate tax is applied. Only some states impose a separate estate tax.

1. Be sure to write a will.

By specifying in a will that your spouse will inherit your entire estate, you may help reduce or eliminate inheritance or estate tax liability, depending on applicable state laws.

2. Use the alternate valuation date.

You can potentially lower the taxable value of your estate by electing to use the estate’s value as of six months after the date of death, rather than at the date of death, if the estate qualifies. This option may result in a lower valuation, which can reduce the overall tax burden.

Start planning early to help manage your inheritance tax exposure.

Creating a will is an important step once you begin accumulating assets. While a will cannot address every detail, it can provide essential instructions for how you wish your wealth to be distributed after your passing. Seeking guidance from a qualified tax specialist, estate planning attorney, or financial advisor can help you navigate the complexities of estate planning. Online resources and educational materials about wills and trusts can also offer helpful insights as you begin the planning process.

3 Estate Tax Planning Strategies

Determine who will carry out your estate plan

In your will, it is important to specify who will have power of attorney in the event of death or incapacitation. This individual will be responsible for making financial decisions on your behalf. You may also need to designate a guardian for any children who have not yet reached the age of majority. Health care decisions, if you are unable to make them yourself, can be managed through a health care power of attorney.

Routinely check the recipients of your retirement plans

Ensure that all your retirement accounts reflect your current wishes regarding the distribution of assets. This is particularly important following major life changes, such as a divorce or a death in the family, to avoid unintended beneficiaries.

Be familiar with federal and state estate and inheritance taxes

Understanding where and how estate and inheritance taxes apply is critical. The state where you reside can significantly impact the taxes owed on your estate. Staying informed can help you make more strategic estate planning decisions.

With thoughtful planning, it is possible to maximize exemption opportunities — such as utilizing combined exemptions for married couples — while protecting the assets intended for your heirs. As tax laws and exemption limits can change, regular review and updating of your estate plan is essential.