If you’re planning how to efficiently pass your wealth to the next generation, understanding inheritance tax, estate tax, and gift tax is crucial. With the tax landscape continually evolving, especially with potential changes anticipated in 2025, it’s essential to review and update your strategies regularly.
In this blog, I'll walk you through practical tax strategies designed to help you minimize your estate and inheritance tax burden and ensure your family benefits from your legacy as fully as possible.
Before we explore strategies, let’s define these three taxes clearly:
The estate tax, sometimes called the "death tax," applies to the transfer of your assets upon your death if the total value exceeds certain federal or state limits. For 2025, the federal estate tax exemption is expected to adjust due to inflation, potentially exceeding the current 2024 level of $13.61 million per person ($27.22 million for married couples).
An inheritance tax is levied on the recipient of an inheritance rather than the estate itself. Unlike estate taxes, inheritance taxes are imposed by a few select states, not at the federal level. As of now, states with inheritance taxes include Pennsylvania, Kentucky, Maryland, Nebraska, New Jersey, and Iowa.
The gift tax is applied to assets or money transferred to another person during your lifetime without receiving something of equal value in return. The federal government provides annual exclusions and lifetime exemptions to minimize the tax burden.
The following strategies are proven ways to reduce your tax liabilities, leveraging rules for inheritance tax, estate tax, and gift tax to your advantage.
Leveraging the annual gift tax exclusion is a straightforward way to reduce the size of your taxable estate. In 2025, the projected annual gift tax exclusion will rise to approximately $19,000 per recipient. For married couples, this effectively doubles to around $38,000 per recipient per year.
Example:
This strategy systematically reduces your estate value and limits your exposure to estate and gift taxes.
The federal estate and gift tax exemptions are unified, projected around $14 million per individual in 2025. Strategically utilizing this exemption throughout your lifetime can significantly minimize future estate taxes.
Consider making strategic gifts during your lifetime that exceed the annual exclusion but stay within the lifetime exemption, transferring assets out of your estate at their current values, potentially appreciating significantly outside your taxable estate.
Trusts are effective tools to transfer wealth, reduce taxes, and protect your assets from probate. Two common trust types include:
Allows you to maintain control and alter the trust during your lifetime, but provides limited tax advantages.
Transfers assets permanently out of your estate, significantly reducing your taxable estate and potential estate taxes.
Irrevocable trusts, such as an Irrevocable Life Insurance Trust (ILIT), can hold life insurance policies outside your taxable estate, eliminating estate taxes on the death benefit proceeds.
Family Limited Partnerships allow you to pass on family-owned businesses or significant assets like real estate. By gifting partnership interests to family members, you can retain control while transferring ownership, effectively reducing your estate size and minimizing estate and gift tax liabilities.
Payments made directly to educational institutions or medical providers are exempt from gift taxes, regardless of the amount. Using this exemption is an effective strategy to transfer wealth tax-free, providing essential support to your family while reducing your taxable estate.
Gifts made to qualified charitable organizations can significantly reduce your taxable estate. Establishing a charitable trust or family foundation allows for structured, long-term giving, offers substantial tax deductions, and leaves a lasting philanthropic legacy.
The concept of portability allows married couples to combine their estate tax exemptions. Upon the first spouse’s death, any unused exemption transfers to the surviving spouse, effectively doubling the survivor’s exemption.
Even if you currently fall below the federal exemption threshold, future appreciation or state-level taxes could push your estate above taxable limits, making proactive planning essential.
Using annual exclusions, direct payments, and lifetime exemptions, most individuals can gift substantial amounts without ever triggering gift taxes.
Inheritance taxes are state-specific, and most states do not impose them. Always check your local laws to determine if inheritance tax will apply to your beneficiaries.
Proactively addressing estate tax, gift tax, and potential inheritance tax implications is essential for preserving your wealth and ensuring your family receives maximum benefit. With thoughtful planning, you can significantly reduce the tax burden your heirs might face, safeguarding your financial legacy for generations to come.
At BetterWealth, our estate planning experts specialize in creating tax-efficient strategies tailored to your individual needs. To start building your personalized tax plan, schedule a consultation today.