Quick primer

Even when your estate is below the federal exemption threshold, estate planning still matters. Federal estate tax applies only when the net value of a decedent’s property exceeds the lifetime exemption amount that the IRS sets and indexes annually. But taxes are only one reason to plan: probate, beneficiary designation errors, illiquid assets (like a family home or business), and state estate or inheritance taxes can create cost and delay for heirs.

(Authority: IRS, Estate and Gift Tax Overview — see https://www.irs.gov/businesses/small-businesses-self-employed/estate-and-gift-tax-overview.)

Why families below the federal exemption still should plan

  • Probate avoidance: Probate can be slow and public. A simple revocable living trust usually doesn’t reduce federal estate tax, but it can keep assets out of probate and speed distribution to heirs.
  • Liquidity needs: Estates that are asset-rich but cash-poor can force heirs to sell property to pay expenses, debts, or taxes. Life insurance or a liquidity plan prevents fire sales.
  • State taxes: Several states impose estate or inheritance taxes at much lower thresholds than the federal exemption. Check your state rules — they can create liabilities even when no federal estate tax is due (see our guide on How State Estate Taxes Differ from Federal Estate Taxes).
  • Income tax consequences: Retirement accounts and IRAs pass with income-tax consequences for beneficiaries; planning helps manage required minimum distributions and tax brackets for heirs.
  • Future risk: Federal exemption amounts are adjusted annually and are subject to legislative change. An estate under the threshold today could exceed it later if values rise or law changes occur.

How the federal exemption works (simple terms)

  • The IRS sets a lifetime exemption amount that shelters a portion of your estate from federal estate tax. Amounts above the exemption are taxed at graduated rates.
  • Exemption amounts are indexed for inflation and may be adjusted by Congress. For example, the exemption was $12.92 million in 2023 (per IRS guidance); always check the current IRS number before planning.
  • Spouses can combine or transfer the unused portion of an estate exemption by electing portability on a timely-filed estate tax return — an important point for married couples with estates near the threshold.

Real-world examples (practical scenarios)

1) The modest estate: Home $350,000 + savings $40,000 + personal property $10,000 = $400,000. No federal estate tax. But without beneficiary designations and a will/trust, the heirs could face probate costs, delays, and disagreement.

2) The business owner: Family-owned rental property is valued at $3 million. Although below common federal thresholds, the property is illiquid; a survivor may need cash to cover mortgages, property taxes, and upkeep. An insurance policy or buy-sell funding can preserve the business for heirs.

3) State-tax surprise: A family in a state with a $2 million state estate tax exemption may owe state tax even when federal tax is zero. State rules and thresholds differ widely.

Planning tools that matter for families below the exemption

  • Wills and beneficiary designations: Keep these current. Retirement accounts and life insurance pass by beneficiary designation — mismatches cause unintended outcomes.

  • Revocable living trusts (RLTs): An RLT does not reduce federal estate tax, but it avoids probate and creates smoother asset transitions. In my practice I use RLTs mainly to simplify distribution and to permit a successor trustee to manage assets quickly after death.

  • Irrevocable trusts: These can remove assets from your taxable estate and help with Medicaid planning, creditor protection, or charitable planning. Irrevocable trusts must be funded and operated correctly to achieve tax advantages.

  • Life insurance placement: If liquidity for final expenses or to equalize inheritances is a concern, properly owned life insurance — for example, in an irrevocable life insurance trust (ILIT) — can provide proceeds that are generally excluded from the insured’s estate.

  • Annual gifting: Smaller gifts can reduce the size of your estate over time. There is an annual gift tax exclusion amount that changes; for reference, it was $17,000 per recipient in 2023. Check current IRS guidance before gifting large sums.

  • Portability election for spouses: If one spouse dies first and doesn’t use the full exemption, the surviving spouse can elect to use the unused portion. This requires timely filing of an estate tax return to elect portability.

For tactical guidance on making sure assets follow your documents, see our Trust Funding Guide: Ensuring Assets Follow Your Estate Plan.

Common misconceptions and mistakes

  • “Below the exemption means no planning needed.” Incorrect. Probate, creditor claims, and state taxes can still create problems.
  • Relying only on a will: Wills control probate distribution but do little for assets that pass by beneficiary designation and do not avoid probate.
  • Forgetting beneficiary updates: Life events (marriage, divorce, births) should trigger a review of beneficiaries and trusts.
  • Assuming life insurance is always out of the estate: If you own the policy at death, proceeds may be includable in your estate unless ownership is properly structured.

Practical, low-cost steps families can take now

  1. Inventory assets and documents: List accounts, deeds, insurance policies, and passwords (consider a digital estate toolkit). This small step reduces executor workload and risk of lost assets.
  2. Update beneficiaries and titling: Confirm payable-on-death (POD), transfer-on-death (TOD), and retirement account beneficiaries match your wishes.
  3. Create a simple will and a durable power of attorney: These documents deal with incapacity and ensure a named agent can act for you.
  4. Consider a revocable trust if you want to avoid probate: Trusts are particularly helpful with real estate and accounts held in multiple states.
  5. Discuss liquidity needs with an advisor: If your estate is mostly illiquid assets, consider life insurance or other liquidity planning.

(If you’d like practical document checklists, see our piece on Estate Plan Resilience: Updating Documents After Major Life Events.)

How federal and state rules interact

  • Federal exemption protects you from federal estate tax only. States may tax estates or inheritances at lower amounts and with different rules. Verify your state’s guidance.
  • Filing an estate tax return at the federal level is rare for estates under the exemption, but many advisers still recommend record-keeping and timely filings when portability or large gifts are involved.

Professional tips from practice

  • Document valuation dates and keep appraisals for real estate or business interests. When I help clients, a clear valuation file reduces disputes and speeds administration.
  • Don’t ignore small assets: a forgotten small brokerage account with no beneficiary can cause probate friction for heirs.
  • Use targeted irrevocable trusts only when the goals are clear (Medicaid lookback, specific creditor protection, accidental complexity can make these counterproductive otherwise).

Frequently asked questions

Q: If my estate is below the federal exemption, will my heirs ever owe taxes?
A: Possibly — state estate or inheritance taxes, income taxes on inherited retirement accounts, and unexpected valuation changes could result in taxes. Plan for these possibilities.

Q: How often should I review my estate plan?
A: Annually and after major life events (marriage, divorce, births, death, large gifts, business sale). Reviews keep beneficiary designations and titling aligned with your documents.

Q: Does a revocable trust reduce estate taxes?
A: No. A revocable trust mainly avoids probate. Irrevocable structures are required to remove assets from your taxable estate.

Action checklist (next steps)

  • Create or update a basic inventory and beneficiary worksheet.
  • Draft a simple will and durable power of attorney if you don’t have them.
  • Talk to a qualified estate planning attorney about trusts if you have specialized needs (business ownership, high liquidity risk, or state-tax exposure).

Sources and further reading

Professional disclaimer

This article is educational and reflects common practice as of 2025, not personalized legal or tax advice. Rules and exemption amounts change; consult a licensed estate planning attorney or tax advisor for guidance tailored to your situation.

If you want, I can add a printable checklist or a short worksheet to help you start gathering the documents and beneficiaries you’ll need.