Estate Tax Planning Strategies to Reduce Your Estate Tax (2025-2026)

The federal estate tax exemption reached a historic high of $13.99 million per person in 2025. The Tax Cuts and Jobs Act provision that doubled the exemption was scheduled to sunset after December 31, 2025, which would drop the exemption to roughly $7 million. As of early 2026, the legislative outcome remains uncertain --- Congress may extend the higher exemption, let it expire, or land somewhere in between. Regardless of the final outcome, the strategies below remain the core toolkit for reducing estate taxes. If you have not yet acted, the urgency depends on whether the higher exemption survives.

Key Takeaways

• The 2025 exemption was $13.99M per person ($27.98M for couples). It may drop to ~$7M in 2026 if the TCJA is not extended.
• Annual gifting ($19,000/person) reduces your estate without touching the lifetime exemption.
• Irrevocable trusts (GRATs, ILITs, IDGTs, QPRTs) can freeze or remove asset growth from your estate.
• Portability lets a surviving spouse inherit unused exemption --- but you must file Form 706 to claim it.
• The IRS has confirmed no clawback: gifts made under the higher exemption are protected if it drops.

The TCJA Sunset: What Is at Stake

The Tax Cuts and Jobs Act of 2017 roughly doubled the estate and gift tax exemption. Here is the trajectory:

Anything above the exemption is taxed at a flat 40%. If you have a $20 million estate and the exemption drops to $7 million, the taxable portion jumps from ~$6 million to ~$13 million --- an additional $2.8 million in estate tax.

For a full primer on how the estate tax works and the rate schedule, see our estate tax basics guide.

Strategy 1: Annual Gift Tax Exclusion

The simplest strategy. Every year, you can give up to $19,000 per recipient (2025, estimated the same for 2026) without filing a gift tax return or using any lifetime exemption. Married couples can give $38,000 per recipient through gift splitting.

How it compounds:

• A couple with 3 children and 6 grandchildren (9 recipients) can give away $342,000 per year.
• Over 10 years, that is $3.42 million removed from the estate --- with zero paperwork beyond the annual gifts.

This strategy works best when started early. It does not require attorneys or trusts. Just write the checks. For a deeper dive, see gift tax limits explained.

Important: Gifts of appreciated assets carry over the donor’s cost basis (no step-up). Consider whether the stepped-up basis at death would be more tax-efficient for highly appreciated assets.

Strategy 2: Use Your Lifetime Exemption Now

If the exemption drops from $13.99 million to $7 million, the roughly $7 million difference is a “use it or lose it” opportunity. The IRS has explicitly confirmed (Treasury Decision 9884) that gifts made under the higher exemption will not be clawed back if the exemption later decreases.

How it works:

1. In 2025, you gift $13.99 million to an irrevocable trust.
2. In 2026, the exemption drops to $7 million.
3. Your lifetime exemption is fully used, but you owe $0 in gift tax because the gift was within the 2025 limit.
4. The $13.99 million (plus all future growth) is permanently outside your estate.

For couples: Both spouses can each gift $13.99 million, removing $27.98 million from the combined estate.

Strategy 3: Irrevocable Trusts

Irrevocable trusts are the primary vehicle for estate tax reduction. Once assets are transferred, they are generally outside your taxable estate. The main types:

Irrevocable Life Insurance Trust (ILIT)

Life insurance proceeds are included in your estate if you own the policy. An ILIT removes them.

• You transfer existing policies (or the ILIT buys new ones) into the trust
• You make annual gifts to the trust to cover premiums (using the $19,000 annual exclusion via Crummey notices)
• At death, insurance proceeds pass to beneficiaries estate tax free

Warning: If you transfer an existing policy, you must survive 3 years or the proceeds are pulled back into your estate (the “3-year rule”).

Grantor Retained Annuity Trust (GRAT)

A GRAT lets you transfer asset growth out of your estate while receiving annuity payments back.

• You fund the GRAT with appreciating assets
• The GRAT pays you an annuity for a fixed term (often 2 years)
• If the assets grow faster than the IRS 7520 hurdle rate, the excess passes to beneficiaries tax-free
• “Zeroed-out” GRATs have no upfront gift tax

GRATs are particularly effective for concentrated stock positions or assets expected to appreciate significantly. See our GRAT estate planning guide for the full mechanics.

Qualified Personal Residence Trust (QPRT)

A QPRT transfers your home to beneficiaries at a deeply discounted gift tax value.

• You transfer your home to the trust but retain the right to live there for a fixed term
• The gift value is reduced because you kept the right to use the property
• If you survive the term, the home passes to beneficiaries at the discounted value
• Risk: If you die during the term, the home snaps back into your estate

QPRTs work best for younger grantors with long life expectancy and valuable residences. See our QPRT guide.

Intentionally Defective Grantor Trust (IDGT)

An IDGT is structured to be a grantor trust for income tax but not for estate tax. This creates a double benefit:

• The grantor pays income taxes on trust earnings (which is itself a tax-free gift to the trust)
• Trust assets grow outside the estate

A common technique is the installment sale to an IDGT: sell appreciating assets to the trust for a promissory note at the low Applicable Federal Rate. All growth above the AFR passes to beneficiaries tax-free, and the sale triggers no capital gains because the grantor and trust are the same taxpayer for income tax purposes.

See our IDGT guide for detailed examples.

Strategy 4: Charitable Planning

Charitable bequests are fully deductible from your taxable estate, and certain charitable trust structures provide income during your lifetime.

Charitable Remainder Trust (CRT)

• You transfer assets to the CRT and receive an income stream for life (or a term of years)
• At the end, the remainder goes to charity
• You get an upfront charitable deduction, and the assets are removed from your estate
• CRTs are tax-exempt, so assets inside grow without annual capital gains taxes

Charitable Lead Trust (CLT)

• The reverse of a CRT: the charity gets income first, beneficiaries get the remainder
• Useful when interest rates are low (the IRS calculates the gift at a discount)
• If trust assets outperform the IRS assumed rate, the excess passes to heirs at reduced transfer tax cost

Direct Charitable Bequests and Donor-Advised Funds

Simply leaving assets to charity in your will removes them from your taxable estate. For lifetime giving, donor-advised funds let you take an income tax deduction now while distributing to charities over time.

Strategy 5: Portability Election

Portability allows the surviving spouse to inherit the deceased spouse’s unused estate tax exemption. If your spouse dies in 2025 and uses only $3 million of their $13.99 million exemption, you can add the remaining $10.99 million to your own.

Critical requirement: You must file Form 706 (federal estate tax return) to elect portability, even if the estate owes zero tax. Many families miss this and lose millions in exemption.

Portability vs. bypass trust: Portability is simpler, but a bypass (credit shelter) trust offers advantages: it protects appreciation from estate tax in the surviving spouse’s estate, provides creditor protection, and ensures assets go to intended beneficiaries (important in blended families). For families with substantial assets, a bypass trust may be preferable. See our trust taxation guide for more on trust structures.

Strategy 6: Stepped-Up Basis Planning

Assets included in your estate receive a stepped-up cost basis to fair market value at death. This means all capital gains accumulated during your lifetime are wiped clean for your heirs.

When it matters: If you hold $5 million in stock with a $500,000 cost basis, your heirs inherit at $5 million basis --- $4.5 million of gain is never taxed (at up to 23.8% capital gains rate, that is over $1 million saved).

The trade-off: Assets must be in your estate to get the step-up. Strategies that move assets out of your estate (like GRATs or IDGTs) sacrifice the step-up. For estates well above the exemption, the 40% estate tax typically outweighs the 23.8% capital gains tax, making removal the better choice. For estates near the exemption line, the math is closer and worth running.

Action Steps for 2026

As of early 2026, Congress has not finalized whether the higher exemption will be extended. Here is what to do now:

Priority	Action
Immediate	Inventory your total estate (assets, insurance, retirement accounts)
Immediate	Determine if your estate exceeds the projected reduced exemption (~$7M per person)
If exemption drops	Gifts completed before January 1, 2026 under the $13.99M exemption are protected from clawback (Treasury Decision 9884)
Ongoing	Work with an estate attorney on trust strategies (GRATs, ILITs, IDGTs) --- these remain effective regardless of the exemption level
Monitor	Watch for Congressional action on TCJA extension; adjust strategy once the 2026 exemption is finalized

Who Needs Estate Tax Planning?

Not just the ultra-wealthy. Consider planning if:

• Your net worth exceeds $7 million (the projected post-sunset exemption)
• You own a business that could appreciate significantly
• You have large life insurance policies (proceeds count as part of your estate)
• You live in a state with a lower exemption (Oregon: $1M, Massachusetts: $2M, New York: $6.94M)
• You want to protect assets for specific beneficiaries (blended families, special needs)

For those with estates between $7 million and $14 million, the sunset creates the most urgency --- you may go from owing nothing to owing 40% on the excess.

Related Guides

• Estate Tax Basics --- exemptions, rates, and how the tax works
• Inheritance Tax vs. Estate Tax --- who pays what
• Grantor Trust Guide --- how grantor trusts work for income and estate tax
• GRAT Estate Planning Strategy --- zeroed-out GRATs and the 7520 rate
• Qualified Personal Residence Trust --- transferring your home at a discount
• Intentionally Defective Grantor Trust --- the installment sale technique
• Gift Tax Limits Explained --- annual exclusion and lifetime exemption
• Trust Taxation Guide --- how trusts are taxed and reported

How sharper.tax Helps

When you upload your tax return to sharper.tax, we analyze your income, investment gains, and retirement balances to help you understand where estate planning strategies could reduce your future tax exposure. We flag high-value opportunities like Roth conversions that double as estate planning tools and identify whether your current asset mix warrants advanced trust planning. sharper.tax exists to make sophisticated tax planning available to everyone for free.

Sources

• IRS Instructions for Form 706 (Estate Tax Return)
• IRS Revenue Procedure 2024-40 (Inflation Adjustments)
• Treasury Decision 9884 (Anti-Clawback Rule)
• IRS Publication 559 (Survivors, Executors, and Administrators)

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The information above is educational and not tax advice.