Federal estate tax planning strategies work by shrinking what the IRS counts as your taxable estate, either by moving assets out during your lifetime or by structuring transfers so the tax code values them at less than face value. Each person can pass up to $15 million free of federal estate tax in 2026 under the One Big Beautiful Bill Act, and a married couple can shield up to $30 million combined through portability.1Internal Revenue Service. What’s New — Estate and Gift Tax Above those thresholds the rate climbs to 40 percent, and that’s where the strategies below earn their keep.
One rule underlies everything that follows: the estate and gift tax exemptions share a single pool called the unified credit. Every dollar you give away above the annual exclusion during your lifetime reduces the amount available to shelter your estate at death. Use $5 million on lifetime gifts and only $10 million remains to shield what you leave behind. The generation-skipping transfer tax exemption also sits at $15 million, so transfers directly to grandchildren or later generations get the same headroom before that additional layer of tax kicks in.
Give Assets Away While You’re Alive
The simplest way to shrink your taxable estate is to hand assets to your heirs now. In 2026 you can give up to $19,000 per recipient per year without filing a gift tax return or touching your lifetime exemption.1Internal Revenue Service. What’s New — Estate and Gift Tax There’s no cap on how many recipients. A couple with three children and six grandchildren can move $342,000 out of their combined estates every year on the annual exclusion alone.
The dollar amount that leaves your estate is only half the benefit. The future growth those assets would have generated also leaves. A $19,000 gift of stock that doubles over the next decade removes $38,000 from your eventual estate, not $19,000. That compounding is why people who start early pull ahead of those who wait.
Gifts above the annual exclusion aren’t taxed immediately. The excess counts against your $15 million lifetime exemption, and you file Form 709 to report the transfer and track how much exemption you’ve used.2Internal Revenue Service. Instructions for Form 709 — United States Gift (and Generation-Skipping Transfer) Tax Return No tax is actually due until the exemption is exhausted, but the IRS needs the running tally, and skipping the return creates problems for your executor later.
Get Life Insurance Out of Your Estate
Life insurance proceeds are income tax-free to your beneficiaries, but they’re not estate tax-free. If you own the policy or keep any control over it when you die, the entire death benefit gets added to your gross estate.3GovInfo. 26 CFR 20.2042-1 — Proceeds of Life Insurance On a $5 million policy held by someone already at the exemption limit, that inclusion triggers $2 million in tax.
An Irrevocable Life Insurance Trust solves this by owning the policy instead of you. The trust has to really own it. “Incidents of ownership” is broad, and it covers the power to change beneficiaries, borrow against the policy, surrender it, or assign it. Keep any of those rights and the IRS treats the proceeds as part of your estate regardless of the trust.3GovInfo. 26 CFR 20.2042-1 — Proceeds of Life Insurance Once you create the trust, you’re out.
Since you don’t own the policy, you can’t pay the premiums directly. You contribute to the trust and the trustee pays. To keep those contributions within the annual gift exclusion, the trust grants beneficiaries a temporary right to withdraw each contribution, known as Crummey powers. Beneficiaries almost never withdraw, but the right must be real and the trustee must give notice each time.
One timing trap: transferring an existing policy into an ILIT triggers a three-year lookback. Die within three years of the transfer and the full death benefit snaps back into your gross estate as if you never moved it.4Office of the Law Revision Counsel. 26 USC 2035 — Adjustments for Certain Gifts Made Within 3 Years of Decedent’s Death The clean fix is to have the trust buy a new policy from the start, so the clock never starts.
Transfer Future Appreciation With a GRAT
A Grantor Retained Annuity Trust lets you move appreciating assets to your heirs while paying little or no gift tax. You put assets into the trust and receive fixed annuity payments for a set term. Whatever remains at the end passes to your beneficiaries. Gift tax applies only to the difference between what you put in and the present value of the annuity you’ll receive, calculated at the IRS Section 7520 rate.5Office of the Law Revision Counsel. 26 USC 2702 — Special Valuation Rules in Case of Transfers of Interests in Trusts
The strategy pays off when trust assets grow faster than the 7520 rate, which has hovered between 4.6 and 4.8 percent in early 2026.6Internal Revenue Service. Section 7520 Interest Rates Any growth above that rate passes to beneficiaries free of gift and estate tax. Planners often build “zeroed-out” GRATs where the annuity payments equal the full value of the assets transferred, making the taxable gift effectively zero and preserving the entire lifetime exemption.
The main risk: if you die before the annuity term ends, the full value of the trust assets is pulled back into your gross estate. You’re back to square one, not worse off, but the planning benefit is gone. That’s why terms of two or three years are common. They cut mortality risk while still capturing meaningful appreciation, and you can roll each remainder into a new GRAT when the term expires.
Combine Philanthropy With Tax Reduction
Charitable trusts pull assets out of your taxable estate, generate income tax deductions, and support causes you care about. They come in two mirrored forms.
A Charitable Remainder Trust pays income to you or your family for a set period, then transfers what’s left to charity. The assets leave your estate when they go into the trust, and you receive an income tax deduction based on the present value of the charity’s future interest. This works especially well with highly appreciated stock. The trust can sell the stock without triggering capital gains tax, reinvest the proceeds, and pay you income from a larger base than you’d have had after selling on your own.
A Charitable Lead Trust flips the order. The charity receives payments first for a term of years, then the remaining assets pass to your heirs. Gift tax on the transfer to heirs is reduced by the value of the charitable payments, which the IRS calculates using actuarial tables.7Office of the Law Revision Counsel. 26 USC 2055 — Transfers for Public, Charitable, and Religious Uses If the trust assets outperform the 7520 rate during the charitable term, your heirs receive the surplus tax-free.
Discount the Value of Family Business Interests
A Family Limited Partnership lets you transfer business or investment assets to the next generation at a discounted value. You contribute assets to the partnership, keep a general partner interest with management control, and gift limited partnership interests to family members. Because those limited interests carry no management rights and can’t easily be sold, they’re worth less than the underlying assets. The IRS accepts this when the structure is done properly.8Office of the Law Revision Counsel. 26 USC 2701 — Special Valuation Rules in Case of Transfers of Certain Interests in Corporations or Partnerships
Discounts for lack of control and lack of marketability commonly range from 20 to 40 percent. A $10 million portfolio inside the partnership might support limited interests valued at $6 to $8 million for gift tax purposes. At a 40 percent estate tax rate, a 30 percent discount on a $10 million transfer saves $1.2 million.
The IRS challenges these partnerships aggressively, and courts have sided with the government when the structure looks like a tax-avoidance wrapper. A qualified appraisal from an independent valuation professional is essential, and the appraiser must clearly explain each discount. The partnership also needs a legitimate business purpose: centralized management of family investments, creditor protection, or keeping a family business intact across generations. Respect the partnership as a real entity — separate accounts, meetings, records, and no dipping into partnership assets for personal expenses.
Use the Marital Deduction and Portability
You can leave an unlimited amount of assets to your spouse free of federal estate tax. The unlimited marital deduction defers tax until the surviving spouse dies.9Office of the Law Revision Counsel. 26 USC 2056 — Bequests, Etc., to Surviving Spouse By itself that’s deferral, not reduction. Portability is what turns it into a planning tool. When the first spouse dies, any unused portion of their $15 million exemption can transfer to the surviving spouse. A couple where the first spouse used none of the exemption gives the survivor a combined shield of $30 million.10Office of the Law Revision Counsel. 26 USC 2010 — Unified Credit Against Estate Tax To claim it, the executor of the first spouse’s estate must file Form 706 and make the portability election, even when the estate is too small to owe tax.
For estates not otherwise required to file, the executor has up to five years from the date of death to file Form 706 solely to elect portability.11Internal Revenue Service. Instructions for Form 706 Miss it and IRS relief becomes expensive and uncertain. A few thousand dollars in professional fees preserves up to $15 million in tax-free transfer capacity. It’s one of the highest-value moves in estate planning.
If Your Spouse Is Not a U.S. Citizen
The unlimited marital deduction does not apply if your surviving spouse is not a U.S. citizen.9Office of the Law Revision Counsel. 26 USC 2056 — Bequests, Etc., to Surviving Spouse Without planning, assets passing to a non-citizen spouse at death are included in the taxable estate like any other transfer.
Two tools address the gap. The annual gift tax exclusion for transfers to a non-citizen spouse is much higher than the standard amount — $194,000 in 2026 rather than $19,000.12Internal Revenue Service. Frequently Asked Questions on Gift Taxes for Nonresidents Not Citizens of the United States Steady annual gifts at that level move substantial wealth outside your estate over time.
A Qualified Domestic Trust allows assets to pass to a non-citizen surviving spouse while preserving the marital deduction. The trust must have at least one U.S. citizen or domestic corporation as trustee, and that trustee must have the right to withhold estate tax from any distribution of principal.13Office of the Law Revision Counsel. 26 USC 2056A — Qualified Domestic Trust Estate tax is imposed on distributions of principal during the surviving spouse’s lifetime and on whatever remains at their death. Income distributions and hardship withdrawals are exempt. For trusts holding more than $2 million, the IRS requires additional security such as a bank trustee or a bond equal to 65 percent of trust assets.14eCFR. 26 CFR 20.2056A-2 — Requirements for Qualified Domestic Trust
Watch for State Estate Taxes
Federal planning is only half the picture. Roughly a dozen states and the District of Columbia impose their own estate taxes, often with exemption thresholds far below the federal $15 million. Oregon’s kicks in at $1 million. Massachusetts starts at $2 million. Several others fall between $3 million and $7 million, and Connecticut’s threshold matches the prior federal exemption of $13.61 million. Rates generally run from about 10 to 16 percent, and they apply independently of the federal tax.
An estate worth $8 million might owe zero federal tax and still face a significant state bill depending on where the decedent lived. Some families address this through domicile planning, but states have become more aggressive about challenging changes that look motivated primarily by tax avoidance. Living in a state with its own estate tax means your planning has to account for both layers.
Don’t Let Penalties Eat the Savings
Form 706 is due nine months after the date of death.15Internal Revenue Service. Instructions for Form 706 Executors can obtain an automatic six-month filing extension by submitting Form 4768 before the original deadline, but the extension covers the filing only.16eCFR. 26 CFR 20.6081-1 — Extension of Time for Filing the Return The tax is still due at nine months.
Penalties add up fast. Failing to file costs 5 percent of the unpaid tax for each month late, capped at 25 percent.17Internal Revenue Service. Failure to File Penalty Failing to pay adds another 0.5 percent per month, also capped at 25 percent.18Internal Revenue Service. Failure to Pay Penalty On a $2 million tax bill that’s $100,000 per month in combined penalties during the first five months, with interest on top. Executors expecting a large liability should estimate what’s owed and pay by the nine-month deadline even when the return itself needs more time.