Overview
Estate‑tax planning is about more than just saving money — it’s about preserving family goals, control, and liquidity at death. Under current law through 2025 the federal estate and gift tax exemption remains elevated (indexed annually and currently above $13 million per individual); however, that higher exemption is scheduled to revert after 2025 unless Congress acts. Because rules change and states vary, effective planning uses multiple tools and regular reviews. For authoritative guidance, start with the IRS estate and gift tax page (IRS: Estate and Gift Taxes).
In my practice working with business owners and families, the most durable outcomes come from combining simple annual gifting with targeted trusts and business‑level techniques. Below I explain the most commonly used strategies, when they help, and important downsides to watch.
Key strategies and how they work
1) Lifetime gifting and the annual gift exclusion
- What it does: Gifts reduce the size of your taxable estate because transferred assets are no longer part of your estate at death. The IRS sets an annual gift tax exclusion that lets you give a set dollar amount to each recipient per year without using any of your lifetime exemption or filing a gift‑tax return for that gift.
- When it helps: Good for high‑liquidity transfers (cash, marketable securities) and for shifting future appreciation out of your estate.
- Watch outs: Large gifts can trigger gift‑tax reporting; gifts of illiquid assets (real estate, private company stock) require valuation care and may benefit from structured transactions (see family limited partnerships below).
2) Irrevocable trusts (ILIT, IDGT, CLT, CRT)
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Irrevocable Life Insurance Trust (ILIT): Places life insurance outside your taxable estate so proceeds are not included in your estate at death. Fund the trust correctly and give the trustee control over policy ownership to avoid estate inclusion. (See also our guide on life insurance riders and trust structures for estate planning.)
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Intentionally Defective Grantor Trust (IDGT): A popular tool for estate transfer of appreciating assets — the grantor pays income tax on trust earnings (a benefit to heirs) while principal growth escapes estate tax at death.
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Charitable Remainder Trust (CRT) and Charitable Lead Trust (CLT): Allow you to shift assets out of your estate while receiving income (CRT) or making charitable gifts while preserving family benefits (CLT). These also deliver income‑tax or estate‑tax deductions in certain situations.
When to use: Irrevocable trusts are powerful where you need creditor protection, exclusion of large life‑insurance proceeds, or want to seed wealth transfers with tax‑efficient growth.
Drawbacks: Irrevocable trusts sacrifice direct control of assets and can have gift‑ and income‑tax consequences. Trustees must be chosen with care.
3) Grantor Retained Annuity Trusts (GRATs) and Qualified Personal Residence Trusts (QPRTs)
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GRATs: You transfer assets to a trust that pays you an annuity for a set term; remaining appreciation passes to beneficiaries with little or no gift tax if structured properly. GRATs work especially well for assets expected to appreciate quickly.
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QPRTs: Move a primary or vacation residence into a trust that eventually passes to beneficiaries. The IRS values your retained interest lower than the home’s full fair market value, reducing the taxable gift.
Caveat: If you die during the trust term, assets may be included back in your estate. Planning horizon and health considerations matter.
4) Family limited partnerships (FLPs) and LLCs for business interests
Business owners can transfer minority interests to family members using FLPs or family LLCs. Carefully drafted partnership agreements can preserve control while transferring future value. Discounts for lack of control and marketability may reduce taxable value, but these discounts are under IRS scrutiny and require credible valuations. (See our article on valuing private company interests for gifting and estate planning.)
5) Installment sales to trusts and valuation planning
Selling an asset to an intentionally defective grantor trust (IDGT) in exchange for an installment note can move future appreciation outside your estate while you receive fixed payments. The technique requires careful legal and tax structuring and often paired with a separate ILIT to provide liquidity for estate taxes.
6) Charitable strategies
Large estates often combine charitable vehicles with estate planning:
- Donor‑Advised Funds (DAFs) allow immediate charitable deductions while giving flexibility on grant timing.
- CRTs convert appreciated assets into a lifetime income stream with a remainder to charity, providing immediate income‑tax benefits and estate‑tax reduction.
- Charitable Lead Trusts (CLTs) pay charities for a set term; the remainder passes to family members with reduced gift or estate tax cost.
Charitable planning is both philanthropic and tax efficient for estates with low‑basis, highly appreciated assets.
7) Life insurance and liquidity planning
Estate taxes can create a liquidity problem: heirs may need cash to pay taxes. Using life insurance kept outside your estate (for example via an ILIT) provides tax‑free death benefit proceeds to pay taxes or equalize inheritances. Avoid making the trust owner/beneficiary mistakes that cause inclusion back into your estate.
8) Portability and spousal planning
Portability allows a surviving spouse to elect to use the deceased spouse’s unused federal exemption. Portability simplifies planning for some couples but doesn’t replace trusts designed for creditor protection or generation‑skipping tax planning. Always file an estate tax return timely to preserve portability.
State estate and inheritance taxes
Many states impose their own estate or inheritance taxes with different exemption amounts and rules. A family with a taxable estate below the federal threshold might still face state taxes. Check state rules, and coordinate state‑level strategies (for example, domicile planning, Roth conversions, or use of state‑level credits).
Common mistakes I see in practice
- Waiting too long: Procrastination reduces options. Some techniques (GRATs, QPRTs) are time‑sensitive.
- Treating estate and income tax independently: Moves that reduce estate tax may create income‑tax costs and vice versa. A coordinated tax view is essential.
- Ignoring portability: Failing to file a timely estate return can forfeit a spouse’s unused exemption.
- DIY valuations on private company stock: Under‑documented discounts invite IRS challenge.
- Overconcentration: Moving a single asset like a family business into a trust without redundancy plans can create operational risk.
Practical, step‑by‑step checklist
- Inventory assets and beneficiaries; quantify likely taxable estate under current law. Include retirement accounts, life insurance, business interests, real property, and personal property.
- Check state rules and potential state exposure.
- Establish short‑term liquidity (life insurance in an ILIT or cash reserves) to cover potential taxes and administration costs.
- Use annual gifting and 529s (for education) to move small amounts tax‑efficiently each year.
- For highly appreciating assets, consider GRATs or IDGT sales to remove future growth from your estate.
- For business owners, evaluate family LLC/FLP transfers and ensure robust valuation reports.
- Add charitable vehicles where philanthropic goals align with tax reduction.
- Review beneficiary designations for retirement accounts — these pass outside probate but are includible in the estate for tax purposes if not structured correctly.
- Revisit the plan every 1–3 years or on major life events (marriage, divorce, sale of business, significant change in asset values).
Examples from practice
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Example 1: A family holding a closely held business used a family LLC with valuation support and annual minority interest gifts to shift ownership over time. Combining that with a buy‑sell funded by life insurance preserved control while using valuation discounts to lower transfer tax costs.
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Example 2: A client with low basis, highly appreciated securities funded a CRT. They received lifetime income, an income‑tax deduction, and removed very large built‑in gains from their estate exposure.
When to consult specialists
Estate planning crosses tax, legal, and financial planning disciplines. Consult a credentialed estate planning attorney and a CPA for complex strategies (GRATs, IDGT sales, FLPs). For life insurance and trust administration, work with an experienced adviser who understands trust drafting and insurance ownership rules.
Useful resources and further reading
- IRS — Estate and Gift Taxes: https://www.irs.gov/businesses/small-businesses-self-employed/estate-and-gift-taxes
- American Bar Association — estate planning guidance (search ABA resources for current materials)
Internal guides on FinHelp you may find helpful:
- Estate planning checkup: documents to review every five years — https://finhelp.io/glossary/estate-planning-checkup-documents-to-review-every-five-years/
- Life insurance riders and trust structures for estate planning — https://finhelp.io/glossary/life-insurance-riders-and-trust-structures-for-estate-planning/
- Valuing private company interests for gifting and estate planning — https://finhelp.io/glossary/valuing-private-company-interests-for-gifting-and-estate-planning/
Final notes and disclaimer
Tax law changes, including the scheduled 2026 sunset of higher exemptions and annual adjustments to gift limits, make ongoing review essential. This article is educational and not individualized tax, legal, or investment advice. For a plan that fits your goals, consult an estate planning attorney and a tax professional.
In my practice, clients who combine early gifting, targeted irrevocable trusts, and liquidity planning tend to preserve the most wealth for heirs while managing family governance and creditor risk.
