How to Pass on Property Without Paying Inheritance Tax

To pass on property without paying inheritance tax, most families simply need to stay under the federal estate tax exemption, which rises to $15,000,000 per person in 2026, and then use a few basic tools to protect what’s left: spousal portability, the unlimited marital deduction, annual and lifetime gifts, the step-up in basis at death, and, for larger estates, irrevocable trusts or charitable bequests.¹ The federal government doesn’t actually impose a separate “inheritance tax.” What people usually mean by that phrase is either the federal estate tax, a state estate or inheritance tax, or the capital gains tax an heir might owe after selling inherited property. Each has its own workaround.

The Federal Exemption Most Estates Never Exceed

The One Big Beautiful Bill Act, signed on July 4, 2025, set the basic exclusion amount at $15,000,000 per person starting in 2026, with no sunset.¹ An estate below that number owes zero federal estate tax. Above it, the rate is effectively a flat 40% on the excess.²

The gross estate is broad. It includes real estate, bank and brokerage accounts, retirement accounts, business interests, and life insurance proceeds you own at death. The IRS requires Form 706 when the gross estate plus adjusted taxable gifts exceeds $15,000,000.³ Filing can still make sense below that line for one specific reason, covered below.

Leaving Property to a Spouse

Anything you leave to a U.S. citizen spouse passes free of federal estate tax, no matter how much. The unlimited marital deduction covers any interest in property that becomes part of the surviving spouse’s estate.⁴ A $50 million estate left entirely to a spouse produces no tax.

The deduction defers the tax rather than eliminating it. When the second spouse dies, whatever is left faces tax above that spouse’s own exemption. For couples with combined estates well under $30 million, deferral plus portability (next section) usually means no federal estate tax is ever owed.

The deduction does not apply if the surviving spouse is not a U.S. citizen.⁴ Mixed-citizenship couples need to plan around this using a qualified domestic trust (QDOT), or the transfer will be taxable.

Portability: Saving the First Spouse’s $15 Million

When the first spouse dies, any unused portion of their exemption can be transferred to the survivor. This is the deceased spousal unused exclusion, or DSUE, and it’s what turns two individual exemptions into a combined $30 million shield.

Portability isn’t automatic. The executor of the first spouse’s estate has to file Form 706 to elect it, even if no tax is owed. The return is due nine months after the date of death, with an automatic six-month extension available on Form 4768. For estates that weren’t otherwise required to file, Revenue Procedure 2022-32 allows a late portability election up to the fifth anniversary of the decedent’s death.⁵

Families lose millions here every year. When a spouse dies with a modest estate and no tax is owed, the family often skips the filing. Five years later the unused exemption disappears. Filing a Form 706 that reports zero tax is one of the highest-value administrative moves in estate planning.

Giving Property Away While You’re Alive

The $19,000 Annual Exclusion

You can give any individual up to $19,000 in 2026 without filing anything or using any of your lifetime exemption.⁶ There’s no cap on the number of recipients. A parent with three children can move $57,000 out of their estate every year without touching the exemption at all.

Married couples can double up through gift splitting. If one spouse writes the check, both can elect to treat it as coming half from each, raising the per-recipient amount to $38,000. Both spouses have to consent on their respective Form 709s, and they must have been married at the time of the gift and not remarry during the rest of the calendar year.⁷

The annual exclusion only covers present-interest gifts, meaning the recipient has immediate access. Future-interest gifts, like most contributions to trusts where the beneficiary can’t touch the money yet, don’t qualify and require a gift tax return regardless of amount.⁸

The $15 Million Lifetime Exemption

The estate tax exemption is actually a unified credit that also covers lifetime gifts. Whatever portion you use during life reduces what’s left at death.¹ Give a child $2 million above the annual exclusion during your lifetime, and your remaining exemption at death drops to $13 million. The gift requires a Form 709 but produces no tax.

The real power of lifetime gifting is what happens next. Any appreciation on the property after the transfer date grows outside your estate. Give a property worth $1 million to your child today, watch it grow to $3 million by the time you die, and that $2 million of growth never enters your taxable estate. For appreciating assets, lifetime gifting is one of the most effective ways to shrink a large estate.

Step-Up in Basis: The Case for Not Gifting

Lifetime gifting has one big downside, and it’s the reason “give it away now” isn’t always the right answer. When property is inherited at death, the cost basis resets to fair market value on the date of death.⁹ When it’s gifted during life, the recipient takes the original owner’s basis.

A parent bought a house in 1985 for $80,000. It’s worth $500,000 today. If they gift it to their child now, the child’s basis is $80,000 and a sale at $500,000 produces a taxable gain of $420,000. If instead the child inherits the house at death, their basis is $500,000 and a sale for the same price produces zero taxable gain.

For highly appreciated property, holding until death and letting the step-up wipe out the embedded gain often beats a lifetime gift. The right call depends on whether the estate tax savings from moving the asset out early outweigh the capital gains cost your heir will absorb later. For estates comfortably under the $15 million exemption, there is no estate tax savings, so holding for the step-up almost always wins.

Irrevocable Trusts for Larger Estates

Once an estate approaches or exceeds the exemption, irrevocable trusts start to earn their complexity. Moving property into an irrevocable trust removes it from your taxable estate because you no longer legally own or control it. Unlike a revocable living trust, which you can dissolve at any time and which remains in your estate, this transfer is permanent. The transfer itself is a taxable gift that uses some of your lifetime exemption, but all future growth happens outside your estate.

Irrevocable Life Insurance Trusts

Life insurance proceeds are included in your gross estate if you own the policy at death. On a $5 million policy, that’s $5 million added to the estate calculation. An irrevocable life insurance trust (ILIT) owns the policy instead. The trust applies for it, pays the premiums using gifts you make to the trust, and collects the death benefit outside your estate.

Transferring an existing policy into an ILIT triggers a three-year lookback. Die within three years of the transfer and the proceeds are pulled back into your estate as if you still owned the policy.¹⁰ Having the trust buy a new policy from the start avoids that problem. The grantor cannot serve as trustee, change beneficiaries, or borrow against the policy.

Qualified Personal Residence Trusts

A qualified personal residence trust (QPRT) transfers your home to your heirs at a discounted gift tax value while you keep living there for a set term, typically 10 to 20 years. The gift value uses IRS actuarial tables and the Section 7520 rate, and it comes in well below market value because the calculation accounts for your retained right to occupy the home.

When the term ends, the home passes to the beneficiaries. If you want to stay, you have to pay them fair market rent under a written lease. The trust can only hold a personal residence, and the transfer year requires a Form 709. Two risks: if you die during the term, the full home value comes back into your estate, and the heirs receive a carryover basis rather than a stepped-up one. QPRTs work best for owners who are relatively young and healthy, transferring a home they expect to appreciate significantly.

Charitable Bequests

Property left to a qualifying charity is fully deductible from the taxable estate with no cap. Qualifying recipients include religious, educational, and scientific organizations, groups that prevent cruelty to children or animals, and federal, state, and local governments receiving property for public purposes.¹¹ A $17 million estate that leaves $2 million to charity brings the taxable amount below the exemption entirely. Charitable remainder and charitable lead trusts let you split the benefit between family and charity while still capturing the deduction.

Special Use Valuation for Farms and Family Businesses

If the property in question is a farm or a closely held business, Section 2032A lets the executor value qualifying real property based on its current use rather than its highest and best use.¹² A 200-acre farm worth $5 million as development land but only $1.5 million as farmland can be valued at the lower figure. The maximum reduction is $750,000, adjusted for inflation from a 1997 base.

The eligibility rules are strict. At least 50% of the adjusted estate value must be property used in the farm or business, and at least 25% must be qualifying real property. The property must have been used for the qualifying purpose for five of the eight years before death, with material participation by the decedent or a family member, and must pass to a qualified heir who continues that use. Selling or converting the property within ten years can recapture the tax savings.¹²

State Estate and Inheritance Taxes

Clearing the federal exemption doesn’t finish the job. Roughly a dozen states and the District of Columbia impose their own estate taxes, some starting at $1 million or $2 million. A handful of states levy inheritance taxes, paid by the recipient rather than the estate, and one state imposes both. Rates at the state level generally run from about 1% to 16%, with the amount often depending on how closely related the heir was to the decedent.

A $3 million estate owes nothing federally but can face a real bill in a state with a $1 million exemption. The state of the decedent’s domicile at death typically controls, and real property in another state may be taxed by that state as well. Families with property in more than one state should account for both.

How the Deed Is Titled

The way you hold title changes what happens at death. Joint tenants with right of survivorship pass the deceased owner’s share automatically to the surviving owner without probate. For married couples, this combines with the unlimited marital deduction to move property tax-free.⁴

Tenants in common each own a defined share that becomes part of the deceased person’s estate and passes under their will. For unmarried co-owners, siblings for example, that share is included in the gross estate and can be taxed if the estate exceeds the exemption.

In community property states, jointly held property gets a full step-up in basis on both halves when one spouse dies. In common-law states, only the deceased spouse’s half is stepped up. That single distinction can be worth six figures in capital gains tax when the surviving spouse sells. Pulling out your deeds and confirming they say what you think they say is the least expensive and most overlooked step in the whole plan.

1
Internal Revenue Service. What’s New – Estate and Gift Tax
2
Office of the Law Revision Counsel. 26 USC 2001 – Imposition and Rate of Tax
3
Internal Revenue Service. Frequently Asked Questions on Estate Taxes
4
Office of the Law Revision Counsel. 26 USC 2056 – Bequests, Etc., to Surviving Spouse
5
Internal Revenue Service. Instructions for Form 706
6
Internal Revenue Service. Rev. Proc. 2025-32
7
Office of the Law Revision Counsel. 26 USC 2513 – Gift by Husband or Wife to Third Party
8
Office of the Law Revision Counsel. 26 USC 2503 – Taxable Gifts
9
Internal Revenue Service. Gifts and Inheritances
10
Office of the Law Revision Counsel. 26 USC 2035 – Adjustments for Certain Gifts Made Within 3 Years of Decedent’s Death
11
Office of the Law Revision Counsel. 26 USC 2055 – Transfers for Public, Charitable, and Religious Uses
12
Office of the Law Revision Counsel. 26 USC 2032A – Valuation of Certain Farm, Etc., Real Property