How estate tax avoidance works in practice

Estate tax avoidance means using legal methods to reduce the value of your taxable estate before you die, so less of it is subject to federal estate tax when it passes to your heirs. The federal estate tax only applies to estates larger than a certain threshold — $13.61 million for deaths in 2024, though this amount changes yearly and is set to drop significantly in 2026 unless Congress acts. Most people's estates fall below this threshold and owe no federal estate tax at all. If yours does exceed it, the tax rate on the excess is 40 percent.

The strategies that work fall into two categories: reducing the size of your taxable estate during your lifetime, and using trusts or other structures to pass money to heirs outside the estate tax system. None of these methods are hidden or illegal — they are all written into the tax code. The key is starting early, because many strategies work only if you set them up years before you die.

Key Takeaways

  • The federal estate tax threshold is $13.61 million in 2024, and most estates do not owe federal estate tax at all.
  • Lifetime gifts up to $18,000 per person per year (in 2024) do not count against your estate tax threshold, and you can give to as many people as you want.
  • An irrevocable life insurance trust removes the death benefit from your taxable estate, but you cannot change or cancel it once it is set up.
  • A charitable remainder trust lets you donate assets to charity, receive income during your lifetime, and reduce your taxable estate.
  • State estate taxes have lower thresholds than federal tax and explore in 17 states plus Washington D.C., so your state of residence matters.

Annual gifts that do not count against your estate

The simplest way to shrink your taxable estate is to give money away while you are alive. The IRS allows you to give up to $18,000 per person per year (in 2024) without any tax consequence and without reducing your lifetime estate tax exemption. This amount, called the annual exclusion, increases slightly most years to keep pace with inflation.

You can give $18,000 to as many people as you want in a single year. If you are married, your spouse can give another $18,000 to each of those same people, doubling the amount. A married couple with three adult children and six grandchildren could give away $324,000 in a single year — $18,000 × 9 people × 2 spouses — and none of it would be taxable or count against either spouse's estate.

The gifts must be to living people and must be outright gifts with no strings attached. You cannot give money to a trust that you control, and you cannot give money on the condition that the person pays you back or uses it a certain way. If you want to give to grandchildren's education, you can pay the tuition bill directly to the school, and that payment does not count against the annual exclusion at all.

Irrevocable life insurance trusts

Life insurance death benefits are normally part of your taxable estate, which means if your estate is large enough to owe tax, the insurance payout gets taxed too. An irrevocable life insurance trust, or ILIT, is a legal structure that owns the insurance policy instead of you. When you die, the death benefit goes to the trust and then to your heirs, but it does not count as part of your taxable estate.

To set up an ILIT, you create the trust document (usually with an attorney), name a trustee to manage it, and transfer an existing policy into it or have the trust buy a new one. You can give money to the trust each year to pay the premiums, and those gifts count against your annual exclusion. The trustee then pays the insurance company.

The catch is that an ILIT is irrevocable — you cannot change it, cancel it, or take the policy back once it is set up. You also cannot be the trustee. If you set up an ILIT and then die within three years, the death benefit is still counted in your estate, so the strategy only works if you live long enough. An attorney who handles estate planning can explain whether this makes sense for your situation and what the setup costs.

Charitable remainder trusts and donor-advised funds

If you want to give to charity, a charitable remainder trust lets you reduce your taxable estate while receiving income during your lifetime. You transfer assets — usually appreciated stock or real estate — into the trust. The trust sells the asset and invests the money. You receive a fixed payment or a percentage of the trust's value each year for the rest of your life (or for a set number of years). When the trust ends, whatever is left goes to the charity you named.

The value of the assets you transferred is reduced on your tax return by the amount the charity will eventually receive, which lowers your taxable estate. You also get a charitable deduction on your income tax return in the year you set up the trust. The trade-off is that you are committed — you cannot change which charity receives the remainder, and you cannot get the assets back.

A simpler option for some people is a donor-advised fund. You contribute money or assets to the fund, take a charitable deduction when ready, and then recommend grants to charities over time — you do not have to decide which charities get the money right away. The fund is irrevocable, so the money is out of your estate, but you have flexibility in how it is distributed. Donor-advised funds are offered by community foundations and financial services firms.

Spousal lifetime access trusts and other trust structures

A spousal lifetime access trust, or SLAT, is a trust you set up during your lifetime and fund with a gift to your spouse. Your spouse can access the money if needed, but the assets are no longer part of your taxable estate. When your spouse dies, the remaining assets go to your children or other heirs you named. The gift to the trust counts against your lifetime estate tax exemption, but if your estate is below the threshold, this does not matter.

A SLAT only works if you are married and if you trust your spouse to follow the terms of the trust. If you divorce, the trust does not automatically change, and the situation becomes complicated. Setting up a SLAT requires an attorney and costs several hundred to several thousand dollars depending on complexity.

Other trust structures include grantor retained annuity trusts (GRATs), which let you transfer appreciating assets to heirs while you receive payments, and intentionally defective grantor trusts (IDGTs), which are used for specific tax situations. These are advanced strategies that require professional guidance to set up correctly.

State estate taxes and where you live

Seventeen states plus Washington D.C. have their own estate taxes, separate from the federal tax. State thresholds are much lower than the federal threshold — they range from $1 million in Oregon to $6.94 million in Massachusetts (in 2024). If you live in one of these states, your estate may owe state tax even if it is below the federal threshold.

The states with estate tax are Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, Mississippi, New Jersey, New York, North Carolina, Ohio, Oregon, Rhode Island, Vermont, Washington, and Washington D.C. Some of these states also have inheritance taxes, which are taxes on the people who receive the money rather than on the estate itself.

If you own property in multiple states or are thinking about moving, your state of residence matters for estate tax planning. An estate planning attorney in your state can tell you whether state tax is a concern for your situation and what strategies explore in your state.

Lifetime exemption and portability between spouses

Everyone has a lifetime estate tax exemption — an amount you can pass to heirs free of federal estate tax. In 2024, this amount is $13.61 million per person. If your estate is smaller than this, you owe no federal estate tax regardless of what you do. If your estate exceeds it, tax is owed only on the excess.

If you are married, your spouse can use any unused portion of your exemption when you die — this is called portability. If you die with a $10 million estate and use $10 million of your exemption, your surviving spouse can use the remaining $3.61 million of yours plus their own $13.61 million exemption, for a combined $17.22 million. Portability is automatic in most cases, but your estate must file a federal estate tax return to claim it, even if no tax is owed.

The exemption amount is set to drop to roughly $7 million per person (adjusted for inflation) on January 1, 2026, unless Congress changes the law. This is why many people with large estates are considering strategies now — the window for using the current high exemption closes in 2026.

Frequently Asked Questions

Do I need to do anything about estate tax if my estate is under $13.61 million?

No federal estate tax is owed, but you should still check your state. If you live in Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, Mississippi, New Jersey, New York, North Carolina, Ohio, Oregon, Rhode Island, Vermont, Washington, or Washington D.C., your state may have a lower threshold. An estate planning attorney in your state can tell you whether state tax applies to you.

Can I give away all my money now to avoid estate tax?

You can give away up to $18,000 per person per year without tax consequences, and you can do this every year. Larger gifts count against your lifetime exemption. If your estate is below the federal threshold, you do not need to worry about this. If it is above the threshold, giving money away during your lifetime does reduce what is taxed when you die, but it also means you no longer have that money.

What happens to my estate tax exemption if I do not use it?

If you die with an unused exemption, your spouse can claim the unused portion through portability — but only if your estate files a federal estate tax return. If you are married and your estate is below the threshold, you should still file the return to preserve your spouse's ability to use your unused exemption. Consult an estate planning attorney about whether this applies to you.

Is it too late to set up an ILIT if I am already sick?

If you die within three years of setting up an ILIT, the life insurance death benefit is included in your taxable estate anyway, so the strategy does not work. An ILIT is most useful if you are in good health and expect to live many years. If you are already ill, other strategies may be more appropriate.

Do I need a lawyer to set up these strategies?

For straightforward strategies like annual gifting, you do not need a lawyer. For trusts — ILITs, SLATs, charitable remainder trusts, or GRATs — you should work with an estate planning attorney. These documents must be drafted correctly to work as intended, and mistakes can be expensive. Attorney fees typically range from several hundred dollars for straightforward trusts to several thousand for complex structures.