How to Avoid Estate Tax: Exemptions, Gifting, and Trusts

Federal estate tax only hits wealth above $15 million per person in 2026, so most families owe nothing. If your estate is near or above that line, you can bring the bill down, often to zero, by combining four moves: claiming the full exemption (and doubling it if you’re married), giving assets away during your lifetime, shifting property into irrevocable trusts, and directing part of your estate to charity. The top federal rate is 40%, so knowing how to avoid estate tax through these tools can save heirs millions.¹

Start With the $15 Million Exemption

The One Big Beautiful Bill Act, signed on July 4, 2025, set the basic exclusion amount at $15 million per individual for 2026, with inflation adjustments in later years and no sunset provision.²³ A unified credit offsets the tax on the first $15 million of taxable transfers. Anything above that starts at an 18% rate and climbs to 40%.¹

A $20 million estate, then, faces tax on $5 million, or roughly $1.95 million. Every strategy below chips that number down.

If you made large gifts between 2018 and 2025 under the earlier, higher exemptions, IRS final regulations protect you. Those gifts won’t be clawed back retroactively; the estate uses the higher of the exemption in effect when the gift was made or the exemption at date of death.⁴

Double the Exemption With Portability

Married couples can shield up to $30 million by using portability. When one spouse dies, any unused portion of their $15 million exemption transfers to the surviving spouse. If the first spouse used $3 million during life, the survivor adds the remaining $12 million to their own $15 million, protecting $27 million in total.⁵

Portability is not automatic. The executor must file IRS Form 706 within nine months of the first spouse’s death, even when the estate is far too small to owe tax. A six-month extension is available. Families lose millions here by assuming a small estate needs no return.

There is a safety net for estates that weren’t otherwise required to file. Revenue Procedure 2022-32 lets the executor file Form 706 up to the fifth anniversary of the date of death, noting at the top of the return that it’s filed under that procedure to elect portability.⁶ After five years, the unused exemption is gone. Any couple whose combined assets might one day exceed a single exemption should treat the Form 706 filing as mandatory when the first spouse dies.

Give Assets Away During Your Lifetime

Every dollar you give away is a dollar that isn’t in your taxable estate. Better still, any appreciation on that gift after the transfer also escapes estate tax.

Annual Exclusion Gifts

In 2026, you can give up to $19,000 per recipient per year with no gift tax consequence and no filing requirement.²⁷ There’s no cap on the number of recipients. A grandparent with ten grandchildren can move $190,000 out of the estate every year without touching the lifetime exemption.

Married couples can give $38,000 per recipient by electing gift splitting, where each spouse is treated as giving half.⁸ Over a decade, a couple gifting to five people could shift $1.9 million out of the estate. Gift splitting does require filing IRS Form 709 for the year, even if each spouse’s share stays under $19,000.⁹

Tuition and Medical Payments

Payments for tuition or medical expenses are excluded from gift tax entirely, with no dollar limit, provided you pay the institution or provider directly.⁷ A $200,000 check to a university for a grandchild’s tuition isn’t a gift at all for tax purposes. Reimbursing the student after they pay does not qualify; the payment has to go directly to the school or provider. These payments stack on top of the annual exclusion, so you can also give the same person $19,000 in cash that year.

529 Plan Superfunding

Education savings accounts allow accelerated gifting. You can contribute up to five years’ worth of annual exclusion gifts to a 529 plan in a single year: $95,000 per beneficiary in 2026, or $190,000 for a married couple splitting the gift. The contribution is treated as spread over five years for gift tax purposes and uses none of your lifetime exemption. If you die during that five-year window, the portion allocated to remaining years gets pulled back into the estate.

Weigh the Stepped-Up Basis Before Gifting Appreciated Assets

This is the trap that catches families trying to be efficient. Inherited assets receive a stepped-up basis: their value for capital gains purposes resets to fair market value at the date of death.¹⁰ If a parent bought stock for $50,000 and it’s worth $500,000 at death, the heir inherits it with a $500,000 basis and can sell it the next day owing zero capital gains tax.

Lifetime gifts get no such reset. The recipient inherits the donor’s original cost basis. Gift the same stock during life, and the recipient keeps the $50,000 basis and owes capital gains tax on $450,000 when they sell. At a 20% long-term rate plus the 3.8% net investment income tax, that’s roughly $107,100 in tax that inheriting would have eliminated.

The rule of thumb: gift cash and assets with little built-in gain to shrink the estate. Hold on to highly appreciated stock, real estate, and business interests so heirs receive the stepped-up basis. For many families with significant unrealized gains, keeping appreciated property inside the estate saves more than gifting it away.

Move Assets Into Irrevocable Trusts

An irrevocable trust removes assets from your estate by stripping away your ownership and control. Once property goes in, you can’t take it back, change the terms, or direct the trustee. That surrender is what makes the strategy work: the IRS treats assets you don’t own or control as outside your estate.

Irrevocable Life Insurance Trust (ILIT)

Life insurance proceeds are pulled into your taxable estate if you held any “incidents of ownership” at death, including the right to change beneficiaries, borrow against the policy, or cancel it.¹¹ A $5 million policy owned personally adds $5 million to the estate. An ILIT owns the policy instead, pays the premiums, and distributes the proceeds outside the estate.

Timing matters more than people expect. Transferring an existing policy to an ILIT and dying within three years snaps the full death benefit back into the taxable estate as if the transfer never happened.¹² The safer path is having the trust purchase a new policy from the start, so the grantor never held ownership.

Grantor Retained Annuity Trust (GRAT)

A GRAT is designed to move asset appreciation to heirs with minimal or no gift tax. You fund the trust and receive fixed annuity payments back over a set term. The IRS assigns a hurdle rate (the Section 7520 rate, published monthly) that the trust assets are assumed to earn. If actual returns beat that rate, the excess passes to your beneficiaries at the end of the term free of gift and estate tax.

Most GRATs are structured as “zeroed-out,” meaning the annuity payments are calculated to return the full original value plus the assumed interest to the grantor, leaving the taxable gift at or near zero. If you die during the term, the assets are pulled back into the estate. GRATs work best with assets you expect to appreciate sharply, like stock in a company approaching an IPO or real estate in a rising market.

Use Charitable Transfers

Every dollar left to a qualified charity is fully deductible from the gross estate, with no percentage cap.¹³ A $10 million bequest to a hospital reduces the taxable estate by $10 million.¹⁴

Charitable Remainder Trust (CRT)

A CRT lets you remove an appreciated asset from your estate while keeping an income stream for life or up to 20 years. You transfer property to the trust and receive annual payments of between 5% and 50% of the trust’s value. When the payment period ends, the remainder goes to the charity you named.¹⁵

The estate receives a deduction based on the present value of what the charity will eventually receive, which must be at least 10% of the initial value placed in the trust. CRTs shine with highly appreciated stock or real estate: the trust can sell the asset without immediate tax, reinvest the proceeds, and pay you income from a larger pool than you would have had after a taxable sale.

Qualified Charitable Distributions From IRAs

If you’re 70½ or older, you can transfer up to $111,000 directly from a traditional IRA to a qualified charity in 2026.¹⁶ These qualified charitable distributions satisfy your required minimum distribution without counting as taxable income. The money leaves your IRA and never passes through your hands, shrinking both your income tax and your eventual estate. Traditional IRAs, inherited IRAs, SIMPLE IRAs, and SEP IRAs qualify. Roth IRAs do not, since distributions are already tax-free.

Don’t Forget State Estate and Inheritance Taxes

Federal planning is only half the picture. Seventeen states plus the District of Columbia impose their own estate or inheritance tax, and the exemption thresholds run far lower than the federal level. Some states start taxing estates at $1 million, so families who owe nothing federally can still owe substantial state tax. One state imposes both an estate tax and an inheritance tax.

The estate tax is paid by the estate based on total value; the inheritance tax is paid by heirs based on what they receive and their relationship to the deceased. Spouses and children often face lower rates or full exemptions; distant relatives and unrelated beneficiaries can face rates as high as 16%.

For people with significant assets living in a taxing state, domicile planning is a common response. Establishing legal residence in a state without an estate or inheritance tax takes more than buying a home there. You need to move your voter registration, driver’s license, bank accounts, and primary physical presence. If you keep spending significant time in the original state, that state may argue you never truly left. The IRS defines domicile as the place where you live with no present intention of moving elsewhere.¹⁷

Filing and Valuation Mistakes That Erase the Savings

Estates that owe tax pay real penalties for filing late or lowballing asset values. The penalty for a late Form 706 is 5% of the unpaid tax per month, up to 25%.¹⁸ On a $2 million tax bill, that’s $100,000 a month. Interest on underpaid estate tax runs from the original due date at a rate the IRS resets quarterly.

Undervaluing assets brings its own penalties. A substantial valuation understatement triggers a 20% penalty on the underpaid tax; a gross valuation misstatement doubles that to 40%.¹⁹ Hard-to-value property (closely held businesses, real estate, art) is where the IRS focuses audits. Qualified appraisals typically run from a few thousand dollars to $10,000 or more for complex business interests. Getting the number right the first time costs far less than defending it later.

1
Office of the Law Revision Counsel. 26 USC 2001 – Imposition and Rate of Tax
2
Internal Revenue Service. What’s New – Estate and Gift Tax
3
Office of the Law Revision Counsel. 26 USC 2010 – Unified Credit Against Estate Tax
4
Internal Revenue Service. Final Regulations Confirm Making Large Gifts Now Won’t Harm Estates After 2025
5
Internal Revenue Service. Instructions for Form 706 – Section: Part VI Portability of Deceased Spousal Unused Exclusion
6
Internal Revenue Service. Revenue Procedure 2022-32
7
Office of the Law Revision Counsel. 26 USC 2503 – Taxable Gifts
8
Internal Revenue Service. Frequently Asked Questions on Gift Taxes
9
Internal Revenue Service. Instructions for Form 709
10
Office of the Law Revision Counsel. 26 US Code 1014 – Basis of Property Acquired From a Decedent
11
Office of the Law Revision Counsel. 26 US Code 2042 – Proceeds of Life Insurance
12
Office of the Law Revision Counsel. 26 US Code 2035 – Adjustments for Certain Gifts Made Within 3 Years of Decedent’s Death
13
Office of the Law Revision Counsel. 26 USC 2055 – Transfers for Public, Charitable, and Religious Uses
14
eCFR. 26 CFR 20.2055-1 – Deduction for Transfers for Public, Charitable, and Religious Uses
15
Office of the Law Revision Counsel. 26 USC 664 – Charitable Remainder Trusts
16
Internal Revenue Service. 2026 Amounts Relating to Retirement Plans and IRAs
17
Internal Revenue Service. Frequently Asked Questions on Estate Taxes
18
Office of the Law Revision Counsel. 26 US Code 6651 – Failure to File Tax Return or to Pay Tax
19
Office of the Law Revision Counsel. 26 US Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments