The most reliable ways to avoid inheritance tax are to give assets away before death, move them into irrevocable trusts that remove them from your estate, and use the unlimited marital deduction to defer tax to a surviving spouse. For 2026, the federal estate tax only reaches assets above $15 million per person, with a top rate of 40% on the excess.1Internal Revenue Service. What’s New — Estate and Gift Tax Married couples who plan correctly can shelter up to $30 million. But a dozen states plus the District of Columbia impose their own estate taxes at much lower thresholds, and five states tax the heir rather than the estate, so the federal exemption alone is not the whole picture.
One boundary worth clearing up first: “estate tax” and “inheritance tax” are not the same thing. The estate tax is paid by the estate before assets are distributed. An inheritance tax is paid by the person receiving the assets. There is no federal inheritance tax. Only Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania impose one.
Leave Assets to Your Spouse and Preserve Portability
The simplest tax-avoidance move is the unlimited marital deduction. Property that passes to a surviving spouse who is a U.S. citizen is deductible in full, so no estate tax is owed no matter how large the transfer.2Office of the Law Revision Counsel. 26 USC 2056 – Bequests, Etc., to Surviving Spouse The catch is that this defers the tax rather than eliminating it. Whatever the surviving spouse still holds at their death becomes part of their estate.
The way to prevent that deferred tax from becoming a real bill is portability. When the first spouse dies, the executor files Form 706 within nine months and elects to transfer the deceased spouse’s unused exclusion to the survivor. An automatic six-month extension is available, and there is a special relief procedure that can still work up to five years after the death.3Internal Revenue Service. Instructions for Form 706 File the election even when no tax is owed. Without it, the surviving spouse loses the ability to stack the two $15 million exclusions and could face estate tax that portability would have wiped out.
Give Assets Away During Your Lifetime
Every dollar you give away while living is a dollar that will not be in your taxable estate. Federal law lets you give up to $19,000 per recipient in 2026 without filing anything or touching your lifetime exemption.4Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 There is no cap on how many recipients you can give to. A married couple can elect to split gifts, which effectively doubles the annual exclusion to $38,000 per recipient regardless of which spouse actually supplies the money.
Anything over $19,000 to a single person is not automatically taxed. Instead, the excess reduces your $15 million lifetime exemption, and you report it on Form 709 by April 15 of the following year. A federal income tax extension automatically extends the Form 709 deadline as well.5eCFR. 26 CFR 25.6081-1 – Automatic Extension of Time for Filing Gift Tax Returns Form 709 is also required whenever a married couple elects gift-splitting, even if each split amount is under the annual threshold.6Internal Revenue Service. Instructions for Form 709 (2025)
Direct Payments for Tuition and Medical Care
There is a separate category of gift, called a qualified transfer, that has no dollar limit at all. Pay a school directly for someone else’s tuition, or pay a medical provider directly for someone else’s care, and the payment does not count against either the $19,000 annual exclusion or the $15 million lifetime exemption.7Office of the Law Revision Counsel. 26 USC 2503 – Taxable Gifts The payment has to go straight to the institution. Reimbursing the student or patient does not qualify. Tuition covers instruction only, not room, board, or textbooks.
Stacked together, these tools move real money. A married grandparent couple can pay a grandchild’s $60,000 tuition bill directly to the university, then each give the same grandchild $19,000 in cash, all in the same year, all outside the lifetime exemption.
Move Life Insurance Out of Your Estate
Life insurance proceeds are pulled into your taxable estate if you held any “incidents of ownership” over the policy at death. That means the right to change beneficiaries, cancel the policy, borrow against its cash value, or assign it.8Office of the Law Revision Counsel. 26 USC 2042 – Proceeds of Life Insurance Even acting as trustee of a trust that holds the policy can count, if that trustee has power over how proceeds get distributed.9eCFR. 26 CFR 20.2042-1 – Proceeds of Life Insurance
An irrevocable life insurance trust (ILIT) removes the policy from your estate by putting it under an independent trustee, with the trust document stripping the grantor of any control. The death benefit then passes to the trust beneficiaries free of estate tax.
Watch the timing. If you transfer an existing policy into an ILIT and die within three years, the IRS pulls the full death benefit back into your taxable estate as if the transfer never happened.10Office of the Law Revision Counsel. 26 USC 2035 – Adjustments for Certain Gifts Made Within 3 Years of Decedents Death The workaround is to have the trust buy a new policy from the start. You fund the trust with cash gifts, the trustee pays premiums, and the trustee sends Crummey letters to beneficiaries so those cash contributions qualify for the annual exclusion. Setting one of these up typically costs several thousand dollars in legal fees, and can run to $15,000 or more for complex situations.
Charitable Remainder and Lead Trusts
Charitable trusts do two jobs at once: they shrink your taxable estate and support a cause. They come in two shapes, and the right one depends on whether you want income now or want to move more to your heirs later.
Charitable Remainder Trust
A CRT pays you (or a beneficiary you name) an annual income for up to 20 years, or for life. When the term ends, the remainder goes to a qualified charity. The trust has to pay out at least 5% of its assets each year, and the projected charitable remainder must be worth at least 10% of what you put in.11Office of the Law Revision Counsel. 26 USC 664 – Charitable Remainder Trusts
You get an income tax deduction the year you fund it, the assets are out of your estate, and the trust itself is exempt from income tax. That last piece is why a CRT works so well for highly appreciated property. The trust can sell the asset, pay no capital gains tax, reinvest the full proceeds, and generate a larger income stream for you than you could produce by selling the asset yourself.
Charitable Lead Trust
A CLT flips the order. The charity gets annual payments for a set term, and whatever is left at the end goes to your heirs. The charity’s income stream reduces the taxable value of the eventual gift to your heirs. If the trust assets grow faster than the interest rate the IRS assumed when valuing the gift, all of that extra growth reaches your heirs tax-free. This structure rewards assets you expect to appreciate sharply.
Transfer Your Home Through a QPRT
A qualified personal residence trust lets you move your home to your heirs at a discounted value. You put the house in an irrevocable trust but keep the right to live there for a fixed number of years. Because the heirs have to wait, the IRS values the gift below the home’s actual market value, with the discount driven by the length of the term, your age, and the applicable federal interest rate.12Office of the Law Revision Counsel. 26 USC 2702 – Special Valuation Rules in Case of Transfers of Interests in Trusts
Outlive the term and the home is out of your estate at that discounted gift value, with all later appreciation escaping estate tax. Die before the term ends and the whole home snaps back into your estate at full current market value. Shorter terms lower the mortality risk but also shrink the discount.
Once the term expires, ownership passes to your heirs or a trust for them. You can stay in the house, but you have to sign a formal lease and pay fair market rent. The rent is actually a bonus: it moves cash from your estate to your heirs without a gift tax hit. The trust cannot sell or transfer the home back to you or your spouse after the term ends.13eCFR. 26 CFR 25.2702-5 – Personal Residence Trusts
Use Valuation Discounts in a Family Limited Partnership
Pooling family assets into a family limited partnership (FLP) or family LLC lets you transfer them at a reduced tax value. Parents typically serve as general partners with management control and gift limited partnership interests to children over time. A limited partner cannot direct management or force liquidation, so those interests are worth less than a straight proportional share of what the partnership holds. A second discount applies because limited interests are not marketable the way publicly traded stock is.
The effect can be significant. A 10% interest in a partnership that owns $1 million of real estate might be valued at $70,000 rather than $100,000 for gift tax purposes, letting you fit more real wealth inside the $19,000 annual exclusion or the $15 million lifetime exemption.
The IRS looks hard at these arrangements. The partnership needs a real business purpose beyond tax savings, such as centralized investment management or creditor protection, and you need a qualified appraiser to defend the discount percentages. If you cannot, the IRS can impose an accuracy-related penalty of 20% of the underpayment, doubling to 40% when the claimed value is 40% or less of the correct value.14Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments
Hold Appreciated Assets Until Death for the Step-Up in Basis
Not every wealth transfer should happen during your lifetime. When heirs inherit property, its tax basis is reset to the fair market value on the date of death.15Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent Decades of built-up appreciation are simply never taxed as capital gains. Stock a parent bought for $50,000 that is worth $500,000 at death gives the heir a $500,000 basis. An immediate sale produces no taxable gain.16Internal Revenue Service. Gifts and Inheritances
Gifting the same asset during life does the opposite: the recipient takes your original, lower basis and owes capital gains tax on the full appreciation when they sell. For heavily appreciated assets, the capital gains savings from holding until death often outweigh whatever estate tax cost comes from including the asset. This is one of the main reasons blanket lifetime gifting is not always the right answer.
Do Not Overlook State Estate and Inheritance Taxes
The $15 million federal exemption can create a false sense of safety. About a dozen states and the District of Columbia impose their own estate taxes, with some exemptions starting as low as $1 million. Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania have inheritance taxes paid by the recipient. Maryland has both.
Inheritance tax rates in those five states range from 0% to 16%, based on the heir’s relationship to the deceased. Spouses are generally exempt, close relatives usually pay little or nothing, and more distant relatives and unrelated beneficiaries pay the most. State rules change often, so an attorney familiar with your state is worth the fee when either tax could reach your estate.