Can Estate Planning Reduce Inheritance Taxes?

If not renewed, the expiration of changes in estate and gift taxes from the Tax Cuts and Jobs Act of 2017 (TCJA) on Dec. 31, 2025, will reduce federal estate tax exemptions to $7 million for individuals and $14 million for married couples. A recent article from CPA Practice Advisor, “A Crucial Window for Estate Planning: Preparing for 2026 Changes,” reminds us the IRS has said any benefits used under the current exemption are not subject to any “claw-backs.” In other words, use this tax advantage while you can.

It is important to note the many benefits of estate planning are not just for wealthy people. The cohort referred to as “mid-affluent”—individuals and couples with or who will have significant assets and growth—should carefully plan for future tax exposure. Someone with $5 million in assets today could see their wealth grow to exceed the future exemption thresholds, making estate planning a vital means of protecting their wealth.

There are several techniques to minimize estate tax consequences, and your estate planning attorney will be able to identify the most appropriate for your unique situation.

Lifetime and Annual Gifting. Making gifts while living transfers wealth to the next generation while minimizing your estate’s tax exposure. Right now, you may gift $18,000 per person, or $36,000 per married couple, to as many people as you wish. Making these gifts annually allows you to reduce your taxable estate and enjoy seeing the recipients benefit from your gifts.  You are able to gift more than $18,000 per person per year, but the filing of a Federal Gift Tax Return is then necessary to claim your credit against federal estate tax.

If you would like to help someone with tuition or medical costs, you may pay any amount you wish without generating gift taxes as long as the payments are made directly to the educational institution or healthcare provider.

Spousal Lifetime Access Trust (SLAT). A SLAT is an irrevocable trust designed to benefit the spouse. Other family members can also be named as beneficiaries. The spouse has access to the income from the trust during their lifetime, and upon the spouse's death, the remainder can be distributed as per the grantor’s wishes.

Grantor Retained Annuity Trusts (GRATs). These trusts are best in a low-interest rate environment. Assets are transferred to the trust, with the right to receive annuity payments for a set period, usually two to ten years. When the grantor dies, assets pass to designated beneficiaries.

Intentionally Defective Grantor Trusts (IDGTs). No, they’re not broken. By creating an “intentionally defective” trust, the grantor splits the income tax responsibility from the estate and gift tax implications. The grantor pays the income taxes, allowing assets in the trust to grow tax-free.

There are more, including Qualified Personal Residence Trusts, Charitable Remainder Trusts, Charitable Lead Trusts, Dynasty Trusts and Irrevocable Life Insurance Trusts.

If you expect the value of your taxable estate to come close to or exceed the future estate tax threshold, now is the time to discuss the various options with your estate planning attorney.

Reference: CPA Practice Advisor (June 13, 2024) “A Crucial Window for Estate Planning: Preparing for 2026 Changes”