Estate Taxes 101: How to Minimize What Your Heirs Owe

Introduction: Keeping More of Your Legacy in the Family

Many people underestimate how estate taxes can hurt inheritances. Property and investments grow in value over time, creating potential tax obligations. The good news is that the right tactics can help you reduce or even eliminate estate tax burdens.

In this guide, we will go over how estate taxes work, who needs to pay them, and strategies to avoid paying unnecessary taxes through trusts, gifts, and life insurance.

What Are Estate Taxes?

Estate taxes are levied on the transfer of assets from a deceased person to their heirs (based on total net value of the estate before distribution happens). There are several types of taxes related to estate planning.

Estate Tax: Paid by the estate before asset distribution. There are estate taxes at both federal and state levels.

Inheritance Tax: Paid by the recipient (heir). Only a few states have the inheritance tax, and some states have eliminated the inheritance tax in recent decades.

All estate taxes are meant to tax large transfers of wealth. Still, with smart planning and legal strategies, most families with large estates can avoid painful tax burdens.

Understanding Federal and State Estate Taxes

Federal Estate Tax

Only estates that exceed the federal exemption limit will need to pay the federal estate tax on the amounts above the threshold. The federal exemption limit for estate taxes was $13.99 million in 2025 and $15 million in 2026.

Federal estate tax rates range from 18% to 40% on taxable amounts above the threshold.

Portability

Unused federal estate tax exemptions can transfer to a surviving spouse. This is a crucial part of tax strategies to avoid paying unnecessarily high amounts of federal estate taxes.

State Estate Taxes

Some states have their own, much lower exemptions, though this can also be around $7 million.

A few states also impose inheritance taxes on beneficiaries and other limitations on inheritances.

Remember: Even if you’re exempt federally, you could still owe state-level estate taxes.

How Estate Taxes Are Calculated

Step 1: Add up all assets

Estate taxes can’t be calculated without knowing how much the estate is worth first. Probate courts can assign officials to evaluate specific assets within an estate. Common estate assets include:

• Real estate
• Investments and stock accounts
• Cash and collectibles
• Retirement accounts
• Business interests
• Life insurance (depending on policy structure)

Step 2: Subtract financial obligations

Debts, expenses, and other financial obligations will be subtracted from the estate valuation. Examples include funeral costs and outstanding loans.

Step 3: Apply the exemption threshold

There are two different exemption thresholds that you need to know. The first is the federal estate tax exemption, which is $15 million as of 2026. The state estate tax exemption amount varies by state, so check your state to see.

Step 4: Tax any amount above the exemption

The estate taxes will apply only to the amount that exceeds the exemption. For example:

Estate value: $16 million

Exemption threshold: $15 million

Taxed amount: Supposing a tax rate of 40%, $1 million excess of the threshold means approximately $400,000 in taxes.

Common Assets That Trigger Estate Taxes

If your loved ones end up being surprised by the estate taxes, it probably means that some asset you own has higher value than you’d expected. Here are some assets that frequently trigger estate taxes.

• Primary residence and investment properties
• Stocks, bonds, and mutual funds
• Life insurance (if policy is owned by the deceased)
• Business ownership or partnerships
• Retirement accounts, such as 401(k) and IRA
• Valuable personal property (art, jewelry, collectibles)

Proven Strategies to Minimize Estate Taxes

Use the Annual Gift Tax Exclusion

The annual gift tax exemption is the amount you can gift tax-free per person per year. The 2026 annual gift tax exemption amount is $19,000 per recipient. This amount can change from year to year, so check before making major gifts to someone every year.

The gift tax exclusion lets you give assets to your heirs before you pass away. This has tons of benefits, including letting you reduce your taxable estate without worrying about who’s getting the gift.

Leverage the Lifetime Gift and Estate Tax Exemption

Lifetime gift and estate tax exemptions can be used thoughtfully for minimizing estate taxes. You can combine large lifetime gifts with estate planning to maximize tax-free transfers.

Set Up Trusts

Trusts are similar to wills in that you can distribute assets through their instructions. However, certain trust structures can be much more complex and offer more tax benefits.

Revocable Living Trusts: Can be easily modified. Avoids the otherwise public probate process, but it does not reduce taxes directly.

Irrevocable Trusts: Irrevocable means that these trusts are hard to modify because you need a court order and/or beneficiary consent. You can use an irrevocable trust to transfer assets from your taxable estate and protect them from estate tax, debt collectors, plaintiffs, and other risks.

Dynasty Trusts: A dynasty trust is a special type of trust that can only be established in certain states. They can last for over a century, enabling you to preserve wealth for multiple generations while avoiding repeated, heavy taxation.

Charitable Remainder Trusts: CRTs provide income for you now while also reducing your estate taxes through charitable giving.

Create an Irrevocable Life Insurance Trust (ILIT)

Let’s talk about ILITs, a special type of life insurance trust. They help keep life insurance proceeds out of your taxable estate, which is crucial because of how these funds can support your loved ones during a critical time. ILITs can be particularly valuable if you have a large estate and are the sole income earner: without a trust, life insurance proceeds may get caught up in the probate process if you have a large estate.

The irrevocable life insurance trust, when properly set up, ensures beneficiaries receive funds tax-free. Just be careful: you cannot easily modify the ILIT after you put the assets into it.

A platform like Ethos makes it easy to secure affordable life insurance for estate planning.

Strategic Marital Transfers

If you give your assets to your spouse, it can be tax-free using the unlimited marital deduction. It is possible to combine this with portability to essentially double your estate exemption. Just be sure your loved ones aren’t missing any portability or transfer deadlines.

Charitable Giving and Philanthropy

Charity goes hand in hand with tax benefits, as people are encouraged to donate. A charitable remainder trust is great if you have a philanthropic cause you care about. Plus, philanthropic donations of appreciated assets can be useful for reducing both income and estate taxes.

Common ways to give include Charitable Lead Trusts and Donor-Advised Funds for long-term giving.

Relocate or Establish Residency in a Tax-Friendly State

Some states offer significant tax benefits that could save you millions of dollars. As you estate plan, consider moving to states without state estate or inheritance taxes like Florida or Texas. A state without dynasty trust restrictions could also be worthwhile if you have legacy goals in mind.

Before moving state lines, be sure to consult with a tax advisor, especially if you have a sizable estate. Moving states is a huge decision that can have many cascading consequences.

The Role of Life Insurance in Estate Tax Planning

Why does life insurance matter for estate taxes

Life insurance can provide liquidity for heirs to pay taxes without needing to sell of estate assets. However, the life insurance needs to be cleverly and properly set up.

How it works:

First, you set up an Irrevocable Life Insurance Trust (ILIT). You make the ILIT the owner of the life insurance policy. Set it up so the proceeds get paid directly to the listed beneficiaries, thus bypassing estate taxes.

Tool tip: Ethos offers affordable term and whole life insurance options that integrate easily with trust-based estate planning.

How to Start Planning Now

1. Inventory your assets and estimate your estate value

Knowing where you’re currently at is important. You may think you know your estate’s value, but it may be surprisingly higher or lower than you believe. Estimate your estate value to be sure.

2. Consult an estate planning attorney or tax professional

Large estates greatly benefit, and sometimes require, the expertise of tax professionals. Estate planning is difficult enough for people with smaller estates. Consult with an expert to ensure you’re making the right choices and using the right strategies for your particular situation.

3. Use trusted tools like LegalZoom to create or update wills and trusts

Not sure where to start, or overwhelmed by paperwork? LegalZoom is a great place to create valid wills and trusts so that they are digitally stored for convenience.

4. Keep your estate plan updated

After major life changes or law changes, it is crucial to review your estate plan to see what changes need to be made. For example, you may need to change the heir in your will if your relationships have changed.

Even without major life events, it is still ideal to review your estate plan every 3 to 5 years.

5. Document everything clearly to reduce confusion or IRS scrutiny later

The IRS will question discrepancies if there are missing documents or confusing estate statuses. Clear documentation now can prevent a mountain of stress later down the line for you and your loved ones.

Common Mistakes That Increase Estate Tax Liability

Assuming your estate is “too small” to be taxed

Cash isn’t all the value for assets. Real estate, vehicles, and other high-value personal property can all go towards an estate’s value, potentially pushing your estate over the tax exemption threshold.

Missing out on early gifting strategies

Gifting strategies can provide immense value over the years–over the years being a key phrase. If you leave everything to be gifted later in life, you might miss out on a lot of its advantages.

Naming yourself as the owner of your life insurance policy

Naming yourself as the owner or forgetting to choose beneficiaries can both cause delays and mistakes later.

Forgetting about state-level taxes

State estate taxes exist. Some states also have state inheritance taxes (Kentucky, Nebraska, Maryland, New Jersey, and Pennsylvania). The exemption thresholds and tax rates often vary greatly from federal-level taxes, so be sure you are aware of these taxes to prevent unexpected tax burdens.

Estate Taxes and the Future: Why Planning Ahead Matters

Tax laws change. Last year, in 2025, people still thought that the federal tax exemption amount was going to be lowered (due to the sunset clause) to ~$7 million. Then, new tax bills resulted in the federal tax exemption going up to $15 million per individual in 2026.

Conclusion: How to Protect Your Legacy

Estate and inheritance taxes can be gigantic, creating financial problems for your estate and heirs. This can hurt your legacy due to lost assets and probate delays. To protect the hard-earned assets you’ve earned and the empire you’ve built, it’s important to do proactive estate planning

Start early, seek advice, and use modern tools like Ethos life insurance and LegalZoom to simplify the process.