Effective estate planning is about more than just deciding who inherits your assets; it’s also about minimizing tax burdens on your loved ones. Legal tax avoidance strategies can help preserve the wealth you’ve worked hard to build while better ensuring that your loved ones receive maximum benefits from your estate.
In 2025, the federal estate tax exemption is $12.92 million per individual, meaning that estates valued lower than this threshold are not subject to federal estate taxes. However, some states impose their own estate or inheritance taxes with lower exemptions. Planning ahead can help reduce or eliminate these taxes, regardless of your estate’s size.
What does lawful tax avoidance look like?
Unlike tax evasion, which is unlawful, tax avoidance is a lawful approach to minimizing taxation. Common tax avoidance strategies utilized during the estate planning process include the following:
- Lifetime Gifts: The IRS allows individuals to gift up to $17,000 annually per recipient without incurring gift taxes. Making lifetime gifts not only reduces the size of your taxable estate but also enables you to see your loved ones benefit from your generosity. For larger gifts, you can use a portion of your lifetime exemption to avoid gift taxes.
- Family Limited Partnerships (FLPs): FLPs allow you to transfer assets to family members at discounted values. This can lower the taxable value of your estate while allowing you to retain some control over your assets.
- Establishing Trusts: Trusts are a cornerstone of tax-efficient estate planning. Options include:
- Irrevocable Life Insurance Trusts (ILITs): Remove life insurance proceeds from your taxable estate.
- Grantor Retained Annuity Trusts (GRATs): Transfer appreciating assets to heirs at a reduced tax cost.
- Charitable Remainder Trusts: Provide income during your lifetime while reducing estate taxes and supporting a charitable cause.
Tax laws are complex and subject to change, which means that it is generally wise to work with an experienced estate planning legal team before committing to any particular tax avoidance approach(es). A well-crafted plan tailored to your financial situation and goals can help to ensure that you minimize taxes while more effectively securing your legacy.