Protecting an inheritance from taxes comes down to a handful of moves used together: giving assets away during your lifetime, moving property into the right kind of irrevocable trust, preserving the step-up in basis where it matters, naming retirement account beneficiaries carefully, and claiming your spouse’s unused exemption when the first of you dies. For 2026, the federal estate tax exemption is $15 million per person, and only the portion of an estate above that threshold is taxed, at a top rate of 40%.1Office of the Law Revision Counsel. 26 U.S. Code 2010 – Unified Credit Against Estate Tax A married couple who plans ahead can shield up to $30 million combined. Even estates well below that line can face state estate or inheritance taxes and income taxes on inherited retirement accounts, so the strategies below matter across a wide range of net worth.
What Actually Gets Taxed
The federal estate tax applies to the fair market value of everything you own at death: real estate, investments, business interests, life insurance proceeds, bank accounts, and personal property. The IRS calls this your gross estate. Anything above the $15 million basic exclusion is taxed on a graduated schedule topping out at 40%.2Internal Revenue Service. What’s New – Estate and Gift Tax The One, Big, Beautiful Bill Act, signed on July 4, 2025, set that $15 million figure for anyone dying in 2026 or later, with inflation adjustments starting after 2026.1Office of the Law Revision Counsel. 26 U.S. Code 2010 – Unified Credit Against Estate Tax The same exemption covers lifetime gifts, because estate and gift taxes share a single unified credit. Every dollar you use during your life reduces what’s left at death.
Give Assets Away While You’re Alive
The simplest way to shrink a taxable estate is to reduce it before death. Federal law lets you give up to $19,000 per recipient per year in 2026 without reporting the gift or touching your lifetime exemption.3Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 The statutory base of $10,000 is adjusted for inflation and rounded to the nearest $1,000.4Office of the Law Revision Counsel. 26 U.S. Code 2503 – Taxable Gifts There’s no limit on how many people you can give to. A married couple with three children and six grandchildren could transfer $342,000 a year (nine recipients, doubled between spouses) without filing anything with the IRS.
The real power is what happens to future appreciation. Give a child stock worth $19,000 today, and if it grows to $100,000 over two decades, that $100,000 is outside your estate. The same shares held until death would sit inside it. Consistent annual gifting of appreciating assets, spread across a big family over ten or twenty years, can quietly move millions out of a taxable estate without using any lifetime exemption.
Gifts above the $19,000 annual threshold start using your $15 million lifetime exemption. You won’t owe tax until cumulative lifetime gifts exceed that amount, but each larger gift has to be reported on Form 709.5Internal Revenue Service. About Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return The IRS uses those returns to track how much of your exemption is left at death.
Move Property Into an Irrevocable Trust
An irrevocable trust is a separate legal entity that owns assets independently of you. Because you’ve given up the right to revoke, amend, or control the trust, the IRS treats those assets as no longer yours for estate tax purposes. It’s the most direct way to remove valuable property from your gross estate while keeping some influence over how it eventually reaches your family.
The catch is real. If you keep meaningful power over the property, the IRS pulls it back into your estate. Federal law says retaining the right to income from transferred property, or the power to decide who benefits from it, causes those assets to be taxed as if the transfer never happened.6Office of the Law Revision Counsel. 26 U.S. Code 2036 – Transfers with Retained Life Estate The trustee has to operate independently, and the trust document can’t give you a back door to direct distributions. That independence is what makes the tax protection work, and it’s where poorly drafted trusts collapse.
Irrevocable Life Insurance Trusts
Life insurance proceeds are included in your gross estate if you own the policy at death. For someone with a $3 million policy on top of a $13 million estate, that pushes the total over the exemption. An Irrevocable Life Insurance Trust solves the problem by owning the policy from the start. The trust applies for coverage, pays the premiums, and collects the death benefit, keeping the whole payout outside your taxable estate.
Moving an existing policy into an ILIT is riskier. Federal law pulls policy proceeds back into your estate if you transferred ownership within three years of death.7Office of the Law Revision Counsel. 26 U.S. Code 2035 – Adjustments for Certain Gifts Made Within 3 Years of Decedent’s Death The safer route is to have the trust purchase a new policy rather than retitling one you already own.
Generation-Skipping Trusts
Leaving assets directly to grandchildren or later generations triggers a separate federal tax, the generation-skipping transfer tax, imposed on top of the regular estate tax. The rate matches the estate tax at 40%, and there’s a separate exemption equal to the basic exclusion, $15 million in 2026.2Internal Revenue Service. What’s New – Estate and Gift Tax A properly structured generation-skipping trust allows assets to benefit multiple generations without being taxed again at each level. Getting the GST exemption allocated to the right trusts at the right time is technical, and mistakes can push the combined effective tax rate close to 65%.
Consider Charitable Trusts If Giving Fits Your Goals
Charitable trusts reduce a taxable estate while supporting causes you care about, and in many cases they still provide income to your family. Two structures work in opposite directions.
A Charitable Lead Trust pays income to a charity for a set number of years. When the term ends, what’s left passes to your family. Because the charity is paid first, the taxable value of the gift to your family is discounted, sometimes substantially. This works especially well when interest rates are low and trust assets grow faster than the IRS’s assumed rate of return.
A Charitable Remainder Trust flips the order. You or your family take income from the trust for a set term or for life, and the charity receives whatever remains. You get an income tax deduction when you fund the trust, and the assets leave your estate immediately. This is a useful tool when you hold highly appreciated property you’d like to sell without triggering a large capital gains bill, since the trust itself can sell the asset tax-free and reinvest the proceeds.
Both structures require a permanent, irrevocable transfer. Once funded, the property is gone. The IRS treats the transfer as a completed gift only when you’ve genuinely surrendered control, and any retained power to redirect the assets will disqualify the tax benefits.8Internal Revenue Service. Abusive Trust Tax Evasion Schemes – Questions and Answers
Protect the Step-Up in Basis
When you inherit property, your tax basis resets to the fair market value on the date the previous owner died.9Office of the Law Revision Counsel. 26 U.S. Code 1014 – Basis of Property Acquired from a Decedent If your parent bought stock for $50,000 and it was worth $500,000 at their death, your basis is $500,000. Sell it the next day and you owe zero capital gains tax. Without the step-up, you’d owe tax on $450,000 of gain. For families with real estate purchased decades ago or long-held stock portfolios, this single rule can save more than any trust or gifting strategy.
The step-up applies to real estate, stocks, bonds, and tangible personal property included in the decedent’s gross estate. Establishing fair market value usually means a qualified appraisal for real estate or the mean trading price on the date of death for publicly traded securities.
The Trust Tradeoff
Here’s where planning gets tricky. The step-up only applies to property included in your gross estate. But the whole point of an irrevocable trust is to remove property from that estate. In 2023, the IRS confirmed that assets held in an irrevocable grantor trust do not receive a step-up at the grantor’s death, because those assets aren’t part of the taxable estate. That means you sometimes have to choose between estate tax savings and capital gains tax savings on the same asset. An irrevocable trust that saves your family $400,000 in estate tax but eliminates a $200,000 step-up still comes out ahead, but the math isn’t always that clean. For assets with moderate appreciation, holding them in your estate and letting heirs take the step-up can be the better play.
What the Step-Up Doesn’t Cover
Traditional IRAs, 401(k)s, and other tax-deferred retirement accounts do not receive a step-up in basis, no matter how they’re held. That money has never been taxed, so heirs pay ordinary income tax on distributions. The IRS calls this income in respect of a decedent, and it’s why retirement accounts follow their own set of rules.
Name Retirement Account Beneficiaries Carefully
Retirement accounts are among the largest assets many families leave behind, and they carry a tax problem no trust can fully solve. Distributions from inherited traditional IRAs and 401(k)s are taxed as ordinary income to the beneficiary. The SECURE Act of 2019 made this heavier by requiring most non-spouse beneficiaries to empty inherited accounts within 10 years of the owner’s death, compressing bigger taxable distributions into a shorter window.
Who Escapes the 10-Year Rule
Five categories of “eligible designated beneficiaries” can still stretch distributions over their own life expectancy instead of the 10-year window:10Internal Revenue Service. Retirement Topics – Beneficiary
- Surviving spouses, who can roll the account into their own IRA and delay distributions until their own required beginning date.
- Minor children, who can stretch distributions until they reach the age of majority, when the 10-year clock starts.
- Disabled or chronically ill individuals, who can take distributions over their own life expectancy.
- Anyone not more than 10 years younger than the account owner, which often includes siblings.
Everyone else, including the adult children who make up most beneficiaries, is stuck with the 10-year rule. Naming a beneficiary directly on the account is critical. When no individual is named, the account defaults to the estate, which triggers an even faster five-year distribution requirement if the owner died before their required beginning date.
See-Through Trusts
A see-through trust (sometimes called a conduit or accumulation trust) names a trust as the IRA beneficiary while allowing the IRS to look through to the individuals behind it. That can help when you want to control how distributions are managed, such as for a minor or for a beneficiary you believe would spend the money quickly. The trust must be irrevocable at the owner’s death, valid under state law, and have identifiable individual beneficiaries. Poor drafting can accidentally accelerate the distribution schedule rather than preserve it, so these designations need to line up with the rest of the plan.
Don’t Lose the Deceased Spouse’s Exemption
When the first spouse dies, any unused portion of that spouse’s $15 million exemption can be transferred to the survivor through a portability election, letting the surviving spouse shield up to $30 million from estate tax without splitting assets or setting up a bypass trust during their lifetimes.11Internal Revenue Service. Instructions for Form 706
The election requires filing Form 706 after the first death, even if the estate is well below the filing threshold and owes no tax. This is where families routinely lose millions in protection: the surviving spouse assumes no return is needed because no tax is due, and the deceased spouse’s exemption simply vanishes. The filing deadline is nine months after death, with a six-month extension available. For estates not otherwise required to file, the IRS allows a late portability election up to five years after the date of death. Executors filing solely for portability can estimate the value of assets qualifying for the marital or charitable deduction in good faith rather than paying for formal appraisals.11Internal Revenue Service. Instructions for Form 706
Check Your State’s Rules
Federal tax is only part of the picture. About 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 threshold is $1 million, and several other states kick in between $2 million and $6 million. A handful of states levy a separate inheritance tax based on the beneficiary’s relationship to the deceased. Close relatives like children often pay nothing, while distant relatives or unrelated heirs can face rates as high as 16%. Maryland imposes both an estate tax and an inheritance tax. State planning matters most for people who own property in multiple states, because each state may try to tax assets located within its borders regardless of where the owner lived.
File the Right Forms on Time
Two IRS forms handle the reporting for most estate and gift tax planning. Form 709 covers lifetime gifts, and Form 706 covers the estate at death.5Internal Revenue Service. About Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return
Form 709 is due April 15 of the year after the gift. Give your daughter $50,000 in 2026, and Form 709 is due by April 15, 2027. The return identifies the donor and recipient, describes the property, and states its fair market value. Any valuation discounts (for lack of marketability, minority interests in a business, or fractional real estate interests) have to be explained and justified on Schedule A.12Internal Revenue Service. Instructions for Form 709
Form 706 is due nine months after death, with a six-month extension available. This return reports the gross estate, claims deductions (charitable, marital, debts, administrative expenses), and calculates any tax owed. It’s also the vehicle for the portability election, the single most commonly missed filing in estate planning. When you fund an irrevocable trust, you’ll also need to retitle assets from your individual name into the trust’s name at banks, brokerages, and county recorder’s offices, which for real estate usually means recording a new deed.