Estate Planning: How to Reduce Taxes for Your Heirs

Introduction

Estate planning is more than just deciding who inherits your assets—it’s about minimizing taxes, preserving wealth, and ensuring a smooth transfer to your heirs. With the right strategies, you can legally reduce or even eliminate estate and gift taxes, potentially saving your beneficiaries hundreds of thousands of dollars.

This guide covers federal estate tax thresholds, gift tax exclusions, step-up in basis, trust strategies, and IRS compliance tips for 2025.

Understanding the Federal Estate Tax in 2025

1.1. Federal Estate Tax Exemption (IRC § 2010)

• For 2025, the federal estate tax exemption is $13.61 million per individual or $27.22 million for married couples.
• Estates exceeding these limits are taxed at a top rate of 40%.

Example:

• John has an estate valued at $15 million.
• Exempt amount: $13.61 million
• Taxable estate: $1.39 million × 40% = $556,000 federal estate tax

1.2. Portability Between Spouses

• A surviving spouse can claim any unused portion of their deceased spouse’s exemption by filing Form 706 within 9 months of death.

The Step-Up in Basis: A Key Tax-Saving Tool (IRC § 1014)

• When heirs inherit assets like real estate or stocks, the cost basis is stepped up to the fair market value at the date of death.
• This significantly reduces capital gains tax if the asset is sold.

Example:

• You bought a property for $200,000, and it’s worth $600,000 when you die.
• Heirs receive it at $600,000 basis. If they sell it for $600,000, no capital gains tax is owed.

3. Annual Gift Tax Exclusion (IRC § 2503(b))

• In 2025, you can gift up to $18,000 per person, per year tax-free.
• Married couples can gift $36,000 jointly to each person.
• Gifts under this threshold do not reduce your lifetime estate tax exemption.

Example:

• A couple with 3 children gifts $36,000 to each child = $108,000/year tax-free.
• This reduces the size of the estate over time.

Use IRS Form 709 to report gifts exceeding the annual exclusion.

Strategic Use of Trusts to Reduce Estate Taxes

4.1. Revocable Living Trust

• Helps avoid probate but does not reduce estate taxes.
• Allows assets to pass quickly and privately to beneficiaries.

4.2. Irrevocable Life Insurance Trust (ILIT)

• Removes life insurance proceeds from your taxable estate.
• Useful for covering estate tax liabilities with non-taxable insurance money.

4.3. Grantor Retained Annuity Trust (GRAT)

• Allows you to transfer appreciating assets out of your estate at a low gift tax cost.

4.4. Charitable Remainder Trust (CRT)

• Donate assets to a charity while retaining income for life.
• Receive a charitable deduction and reduce estate size.

Other Tax-Saving Estate Planning Techniques

5.1. Lifetime Gifting Strategy

• Gradually reduce estate size by using the $18,000 annual exclusion consistently.

5.2. 529 College Savings Plans

• Contributions to 529 plans are considered gifts, but you can front-load 5 years’ worth of gifts—up to $90,000 per beneficiary (or $180,000 for couples).

5.3. Family Limited Partnerships (FLPs)

• Transfer family business interests to children while retaining control.
• Use valuation discounts to reduce gift tax exposure.

How to File & Comply with IRS Rules

Step 1: Inventory Your Assets

• Include real estate, investment accounts, retirement plans, business ownership, and personal property.

Step 2: Understand Taxable vs. Non-Taxable Assets

• Life insurance proceeds, retirement accounts, and jointly owned property may trigger estate tax or income tax.

Step 3: File IRS Forms as Needed

• Form 706 – Estate Tax Return (if estate exceeds $13.61 million)
• Form 709 – Gift Tax Return (for gifts exceeding $18,000 per year)

Step 4: Set Up Trusts and Legal Structures

• Consult an estate planning attorney or CPA to create trusts and ensure legal documentation is complete and IRS-compliant.

Common Estate Planning Mistakes to Avoid

• Failing to update wills and beneficiaries
• Not taking advantage of lifetime gifting exclusions
• Ignoring the step-up in basis
• Missing the 9-month deadline to file Form 706 for portability

Conclusion

Estate planning is essential to protect your wealth and reduce the tax burden on your heirs. By using strategies like gifting, trusts, and step-up in basis, you can legally minimize estate and inheritance taxes and ensure a smooth transfer of assets to future generations.

To create a customized estate tax strategy, schedule a consultation with Anshul Goyal, CPA EA FCA. Book an appointment here:

About Our CPA

Anshul Goyal, CPA EA FCA is a licensed Certified Public Accountant (CPA) in the United States, an Enrolled Agent (EA) admitted to practice before the IRS, and a cross-border tax expert. He specializes in IRS compliance, tax litigation, estate tax planning, and helping American families and Indian expatriates preserve wealth across generations.

Frequently Asked Questions (FAQs)

1. How much can I leave my heirs without paying estate tax?
In 2025, you can leave up to $13.61 million per person tax-free.

2. What is the annual gift tax exclusion for 2025?
You can give up to $18,000 per person per year without paying gift tax.

3. Do inherited assets receive a step-up in basis?
Yes, most inherited assets receive a step-up to fair market value, reducing capital gains tax if sold.

4. What is IRS Form 706 used for?
Form 706 is used to report estate taxes and claim portability between spouses.

5. How do trusts reduce estate taxes?
Trusts like ILITs and GRATs remove assets from your taxable estate, potentially saving millions in estate taxes.