Estate Tax Planning Strategies for 2026

Estate taxes are not just a concern for the ultra-wealthy — especially if you live in a state with its own estate tax. The 2026 federal "sunset cliff" that many guides still describe did not happen. Public Law 119-21 set the federal basic exclusion at $15,000,000 for calendar year 2026. This guide covers the current federal numbers, annual gifting, and the trust and business strategies that still matter when state tax or a truly large estate is in play.

Understanding Estate Taxes

The federal estate tax is a tax on the right to transfer wealth at death. It applies to the fair market value of everything you own or control at the time of your death — real estate, investments, business interests, retirement accounts (in some cases), life insurance (if you own the policy), and personal property. The resulting gross estate is reduced by allowable deductions, including debts, funeral expenses, charitable bequests, and property passing to a surviving spouse (the marital deduction). Whatever remains above the applicable exemption amount is subject to tax at a flat rate of 40%.

The Federal Exemption Amount

The federal estate tax exemption — the amount you can transfer free of estate tax — has fluctuated significantly over the decades. Under the Tax Cuts and Jobs Act of 2017, the exemption was roughly doubled. For 2026, the basic exclusion is $15,000,000 per individual (Pub. L. 119-21; IRS What's New — Estate and gift tax). For married couples who properly elect portability, unused federal exclusion can pass to a surviving spouse. That federal portability election does not automatically apply to state estate taxes.

The 40% Tax Rate

The federal estate tax rate is a flat 40% on all taxable transfers above the exemption. There is no graduated rate structure at the federal level — every dollar above the threshold is taxed at 40%. A $20 million estate with a $15,000,000 exclusion (and no other deductions) would have $5 million exposed at 40%. State estate taxes, where they exist, can apply far below the federal line.

State Estate Taxes: An Added Layer

Many taxpayers focus exclusively on the federal estate tax and overlook the fact that several states and the District of Columbia impose their own estate taxes, often with significantly lower exemption thresholds. States with estate taxes include Massachusetts, Oregon, Washington, Minnesota, Illinois, Maryland, Vermont, Connecticut, New York, Rhode Island, Maine, and Hawaii. Massachusetts requires a return when the gross estate plus adjusted taxable gifts exceeds $2,000,000 and allows a credit of up to $99,600 (Massachusetts Estate Tax Guide). Oregon still uses a $1 million threshold. State estate tax rates typically range from 8% to 20%.

A few states — Iowa, Kentucky, Nebraska, Maryland, New Jersey, and Pennsylvania — impose an inheritance tax instead of or in addition to an estate tax. Inheritance taxes are assessed on the beneficiaries, not the estate, and rates depend on the relationship between the decedent and beneficiary. Close relatives (spouses, children) typically pay no tax or a low rate; more distant relatives or unrelated beneficiaries face higher rates.

The Gift Tax and the Unified Credit

The federal estate tax and the federal gift tax are unified — they share a single lifetime exemption amount. The gift tax applies to transfers of property during your lifetime, and each taxable gift reduces the remaining exemption available at death. The unified credit is the mechanism through which this shared exemption operates. If you give away $3 million in taxable gifts during your lifetime, your estate tax exemption at death is reduced by $3 million.

The annual gift tax exclusion ($19,000 per recipient per year in 2025 and 2026, per the IRS) operates separately and does not reduce the lifetime unified credit. We'll cover gifting strategies in detail in the section below.

What Actually Happened to the 2026 Exemption

For several years, planners warned that the Tax Cuts and Jobs Act's elevated exemption would sunset on December 31, 2025 and drop toward a pre-2018, inflation-adjusted figure. That federal cliff did not happen. Public Law 119-21 increased the basic exclusion amount to $15,000,000 for calendar year 2026. The IRS publishes the year-of-death table and the $19,000 annual exclusion for 2025 and 2026 on What's New — Estate and gift tax.

Federal numbers that matter in 2026

Anti-Clawback Regulations

The IRS issued final Treasury Regulations providing that gifts made during a high-exemption period will not be subject to "clawback" if the exemption later decreases. Those rules still matter if Congress later changes the exclusion. They are not a reason to narrate a 2026 federal drop that did not occur.

What to Do Right Now

If your estate (individually or combined with a spouse) may face federal or state estate tax, the following steps still make sense — without a fake 2026 federal deadline:

1. Obtain a comprehensive estate valuation (especially if you own a business or real estate).
2. Review existing irrevocable trusts and evaluate whether additional funding makes sense.
3. Work with your estate planning attorney to model gifting scenarios and identify optimal trust structures.
4. If you're married, confirm whether a federal portability election was properly made on a timely Form 706. Do not assume state portability exists.
5. Check your state's 2026 filing threshold — it may be a small fraction of $15,000,000.

Gift Tax Strategies

Lifetime gifting is the most accessible estate tax reduction strategy for most families. Every dollar transferred out of your estate during your lifetime — if done correctly — removes not just that dollar from estate tax exposure but also all future appreciation on that dollar. A gift of stock worth $500,000 today that grows to $2 million over 20 years removes $2 million from your taxable estate, not just $500,000.

The Annual Gift Tax Exclusion

The annual gift tax exclusion allows you to give up to $19,000 per recipient per year (2025 and 2026) without using any of your lifetime exemption and without filing a gift tax return. This amount is indexed for inflation in $1,000 increments. There is no limit on the number of recipients — you could give $19,000 each to 100 different people in the same year, transferring $1.9 million entirely free of gift tax. Gifts at or below this amount also do not reduce your estate tax exemption.

Gift Splitting for Married Couples

Married couples can elect to "split" gifts on a gift tax return, treating a gift made by one spouse as if each spouse made half. This doubles the annual exclusion to $38,000 per recipient per year in 2025–2026, even if only one spouse is the legal owner of the gifted property. Gift splitting requires both spouses to consent on a timely filed gift tax return (Form 709), even if no tax is owed.

Gifts to 529 Plans: The 5-Year Election

529 education savings plans offer a special "superfunding" opportunity. You can contribute up to five years' worth of annual exclusion gifts in a single year — $95,000 per beneficiary at the 2026 $19,000 exclusion (or $190,000 for a couple using gift splitting) — and elect to spread the gift over five years for gift tax purposes. You must file Form 709 to make the election. During the five-year period, you cannot make additional annual exclusion gifts to the same beneficiary, and you cannot contribute more to the same account without gift tax implications. 529 assets also receive favorable estate tax treatment: if you die during the five-year period, only the pro-rata unelapsed portion is included back in your estate.

Direct Payments for Medical and Educational Expenses

One of the most powerful — and underused — gifting strategies is the exclusion for direct payments of medical and educational expenses. Under IRC Section 2503(e), amounts paid directly to an educational institution for tuition, or directly to a medical provider for medical care, are completely excluded from gift tax with no limit and no reduction of your lifetime exemption. There is no dollar cap. A grandparent who pays $80,000 annually in tuition directly to a private school or university, year after year, removes that entire amount from their estate with zero gift tax consequences. This exclusion applies to any person — there is no requirement that the recipient be a family member. The key requirement is that payments go directly to the institution or provider, never to the individual first.

Using Your Lifetime Exemption Now

Large taxable gifts that consume lifetime exemption remain a strategy for high-net-worth individuals — especially if assets are expected to appreciate, or if a state estate tax applies well below the federal line. Thanks to the anti-clawback regulations discussed above, gifts made under a higher exemption are protected if the exemption later declines. Commonly gifted assets include:

• Appreciating assets: Securities, real estate, or business interests expected to grow significantly.
• Assets subject to valuation discounts: Minority interests in LLCs or family limited partnerships can be valued at a discount to fair market value, allowing more assets to be transferred per dollar of exemption used.
• Low-basis assets held in trust: Depending on the trust structure, care must be taken to preserve step-up in basis — see the Step-Up in Basis section below.

Irrevocable Trust Strategies

Irrevocable trusts are the workhorses of advanced estate tax planning. Unlike a revocable living trust — which you can modify or revoke at any time but which does not remove assets from your taxable estate — an irrevocable trust generally removes assets from your estate permanently in exchange for estate tax savings and asset protection benefits. Each type of irrevocable trust serves a different purpose and suits different client profiles. For a broader look at how trusts work, see our Complete Guide to Trusts in 2026.

GRATs: Grantor Retained Annuity Trusts

A Grantor Retained Annuity Trust (GRAT) allows you to transfer appreciation on assets out of your estate at low or no gift tax cost. Here's how it works: you transfer assets to an irrevocable trust and retain the right to receive a fixed annuity payment each year for a set term. The IRS values the taxable gift as the transferred assets minus the present value of the retained annuity (calculated using the Section 7520 hurdle rate). If you set the annuity high enough, the taxable gift can be zero or near-zero — a "zeroed-out" GRAT.

The strategy succeeds when the assets grow faster than the IRS hurdle rate. All appreciation above the hurdle rate passes to the remainder beneficiaries (typically children or a trust for their benefit) estate-tax-free. If the assets underperform or the grantor dies during the term, the GRAT fails and assets return to the estate — but there is no worse outcome than doing nothing. GRATs are most effective in low-interest-rate environments and with high-growth assets like business interests or concentrated stock positions.

Who benefits: High-net-worth individuals with concentrated positions in volatile or high-growth assets who want to transfer wealth at minimal gift tax cost. Particularly powerful in low-interest-rate environments.

Key considerations: The grantor must outlive the GRAT term; GRATs cannot be used for GST tax planning (short-duration GRATs have no GST allocation benefit); requires active management and potentially annual rollovers ("rolling GRATs").

SLATs: Spousal Lifetime Access Trusts

A Spousal Lifetime Access Trust (SLAT) is an irrevocable trust to which one spouse (the "donor spouse") makes a gift, naming the other spouse (the "beneficiary spouse") as a discretionary beneficiary during their lifetime. Because the assets pass to an irrevocable trust rather than directly to the donor spouse, they are removed from the donor spouse's taxable estate. Yet the family retains indirect access to the assets through distributions to the beneficiary spouse.

SLATs remain a common way to use exemption while keeping indirect household access through the beneficiary spouse. A donor spouse can gift up to their remaining exemption amount to the SLAT. Both spouses can each create a SLAT for the other (called "reciprocal SLATs"), but care must be taken to ensure the trusts are not substantially identical, which could trigger the reciprocal trust doctrine and cause the trusts to be included back in each grantor's estate.

Who benefits: Married couples who want to use federal (and, where relevant, state) exemption while maintaining some access to the transferred assets through the beneficiary spouse.

Key considerations: Divorce risk — if the couple divorces, the donor spouse loses all indirect access to the SLAT assets. Death of the beneficiary spouse eliminates access. Reciprocal SLAT risk if both spouses establish SLATs.

IDGTs: Intentionally Defective Grantor Trusts

An Intentionally Defective Grantor Trust (IDGT) is an irrevocable trust that is "defective" for income tax purposes but effective for estate tax purposes. The trust is structured so that the grantor is treated as the owner for income tax purposes under the grantor trust rules (IRC Sections 671–679), meaning the grantor pays income taxes on trust income. But the trust assets are outside the grantor's taxable estate for estate tax purposes.

This creates a powerful double benefit: the grantor's payment of income taxes on trust income is effectively a tax-free gift to the trust (since the trust's assets are not depleted to pay taxes), and the payment further reduces the grantor's taxable estate. IDGTs are often paired with an installment sale: the grantor sells assets to the IDGT in exchange for a promissory note at the applicable federal rate (AFR). Because the trust is ignored for income tax purposes, the sale triggers no capital gains. The trust receives appreciating assets, growth above the AFR escapes transfer taxes, and the grantor receives periodic interest and principal payments.

Who benefits: High-income individuals with high-growth assets who can afford to pay trust income taxes out of pocket and who have sufficient assets for a meaningful installment sale.

Key considerations: Requires careful drafting to achieve grantor trust status without estate inclusion; income tax payment by the grantor is voluntary but must be sustainable; IRS scrutiny of related-party sales.

ILITs: Irrevocable Life Insurance Trusts

An Irrevocable Life Insurance Trust (ILIT) is designed to remove life insurance proceeds from your taxable estate while providing liquidity to pay estate taxes. If you own a life insurance policy at death, the entire death benefit is included in your gross estate. An ILIT owns the policy instead, so proceeds are paid to the trust — outside your estate — and can be used to purchase assets from the estate or make estate tax loans, providing cash without estate tax on the insurance itself.

ILITs are typically funded using annual exclusion gifts: you transfer premiums to the ILIT each year (using "Crummey" withdrawal rights to qualify the gifts for the annual exclusion), and the trustee uses those funds to pay policy premiums. Properly structured, the ILIT uses no lifetime exemption and still removes potentially millions in death benefit from your estate.

Who benefits: Anyone with a large life insurance policy, particularly those whose estate might face liquidity issues at death (common for business owners or real estate investors with illiquid estates).

Key considerations: Existing policies transferred to an ILIT require a three-year waiting period before proceeds are excluded from the estate; "Crummey" notices must be properly sent annually; trust administration requirements are ongoing.

Irrevocable Trust Comparison

Charitable Planning

Charitable giving and estate tax planning are natural partners. Every dollar left to a qualifying charity at death reduces your taxable estate by a full dollar — an unlimited estate tax charitable deduction. But the most sophisticated charitable planning tools go further, allowing you to benefit charity and your family simultaneously, often with income tax deductions as an added benefit.

Charitable Remainder Trusts (CRTs)

A Charitable Remainder Trust (CRT) is an irrevocable trust that pays income to you (or other non-charitable beneficiaries) for a term of years or your lifetime, with the remainder passing to one or more charities at the end. You receive an immediate income tax charitable deduction for the present value of the charitable remainder interest when you fund the trust. Assets transferred to the CRT are removed from your taxable estate, and the trust itself pays no income tax on investment gains — making CRTs an excellent vehicle for transferring highly appreciated, low-basis assets like long-held stock or real estate.

There are two main varieties: a Charitable Remainder Annuity Trust (CRAT) pays a fixed dollar amount annually, while a Charitable Remainder Unitrust (CRUT) pays a fixed percentage of trust assets annually, revalued each year. CRUTs allow additional contributions; CRATs do not. Minimum charitable remainder requirements apply (at least 10% of the initial contribution must be expected to pass to charity based on IRS actuarial calculations).

Tax benefits: Upfront income tax deduction; avoidance of capital gains on contributed appreciated assets; estate tax reduction; potential income stream for retirement.

Best for: Charitably inclined individuals with highly appreciated low-basis assets who want to diversify without an immediate capital gains hit.

Charitable Lead Trusts (CLTs)

A Charitable Lead Trust (CLT) is the reverse of a CRT: the trust pays income to charity first for a term of years, then the remainder passes to your heirs. CLTs are estate freezing tools — the taxable gift to heirs is the present value of the remainder interest, calculated using the IRS Section 7520 rate. In a low-interest-rate environment, the present value of the charitable lead payments is high, reducing the taxable remainder gift dramatically.

CLTs come in two forms: a Charitable Lead Annuity Trust (CLAT) pays a fixed dollar amount to charity, while a Charitable Lead Unitrust (CLUT) pays a fixed percentage of trust assets. Grantor CLTs provide an upfront income tax deduction but cause trust income to be taxed to the grantor. Non-grantor CLTs do not provide an income tax deduction but allow trust income to be taxed at trust rates.

Tax benefits: Transfer assets to heirs at a significant discount; works especially well in low-interest-rate environments; satisfies charitable intent while benefiting family.

Best for: Charitably inclined high-net-worth individuals who want to transfer assets to heirs at reduced estate or gift tax cost over time.

Donor-Advised Funds (DAFs)

A Donor-Advised Fund (DAF) is the simplest and most accessible charitable planning tool. You contribute assets to a DAF — operated by a sponsoring organization like Fidelity Charitable, Schwab Charitable, or a community foundation — and receive an immediate income tax deduction for the full fair market value of the contribution. You then recommend grants from the DAF to qualifying charities over time, at your own pace.

DAFs are particularly effective for bunching charitable deductions in high-income years: contribute several years' worth of charitable giving at once to clear the standard deduction hurdle, then distribute the grants to charities over time. Highly appreciated assets contributed to a DAF are not subject to capital gains tax, and the full fair market value is deductible (subject to AGI limits).

For estate planning purposes, a DAF can be named as the beneficiary of retirement accounts or life insurance, satisfying charitable intent while keeping lower-basis assets in the estate for the step-up benefit (see the Step-Up in Basis section).

Direct Charitable Bequests

The simplest charitable technique is a direct bequest in your will or trust. Amounts left to qualifying charities (IRC Section 501(c)(3) organizations, government entities, or certain other organizations) are fully deductible for estate tax purposes — no dollar limit. Charitable bequests can be specific ("I give $500,000 to the American Red Cross"), percentage-based ("I give 20% of my residuary estate to charity"), or contingent ("If my spouse does not survive me, my residuary estate passes equally to the following charities...").

Retirement accounts (IRAs, 401(k)s) are among the most tax-efficient assets to leave to charity. They are included in your gross estate for estate tax purposes and fully taxable as ordinary income to individual beneficiaries. But a charity pays no income tax on retirement account distributions, making a direct retirement account beneficiary designation to charity a way to satisfy both estate and income tax simultaneously.

Charitable Planning Comparison

Business Owner Tax Strategies

Business owners face unique estate planning challenges. Their primary asset — the business — is often illiquid, difficult to value, and central to the family's financial well-being. Simultaneously, closely held business interests are frequently the largest driver of taxable estate value. Specialized strategies exist to reduce that value for transfer tax purposes while maintaining business continuity and family control.

Valuation Discounts

One of the most powerful techniques for business owners is transferring minority interests in a business entity — typically an LLC or family limited partnership — at a discount to the pro-rata net asset value. Two types of discounts apply:

• Minority interest discount: A minority owner lacks control over the entity — cannot force distributions, liquidate the business, or compel a buyout. A qualified appraiser can support discounts of 15%–35% on minority interests for this lack of control.
• Lack of marketability discount: Interests in a closely held entity cannot be easily sold on a public market. Combined with minority discount, total discounts of 25%–45% on the transferred value are common and defensible with proper appraisal support.

Combined, these discounts allow business owners to transfer significantly more economic value per dollar of gift tax exemption. Example: if your $10 million LLC interest is transferred as a minority interest subject to a 30% combined discount, the taxable gift is $7 million — meaning $3 million transfers free of gift tax that would otherwise consume exemption.

Family Limited Partnerships (FLPs) and LLCs

A Family Limited Partnership (FLP) or family LLC is an entity specifically designed to hold family assets, provide asset protection, facilitate controlled wealth transfer, and achieve valuation discounts. The senior generation typically retains the general partner or managing member interest (maintaining control over distributions and management), while transferring limited or non-managing member interests to children or trusts for their benefit.

FLPs must be structured and operated as legitimate business entities — they must have genuine non-tax business purposes, actual operational activities, and must observe entity formalities. The IRS aggressively challenges FLPs that appear to be purely estate tax avoidance vehicles with no real business purpose. Successful FLPs typically manage investment portfolios, family business assets, rental real estate, or operate family businesses with genuine economic activities.

Buy-Sell Agreements and Life Insurance

A buy-sell agreement is a legally binding contract that governs what happens to a business owner's interest when they die, become disabled, or wish to exit. For estate tax purposes, a properly structured buy-sell agreement can fix the value of the business interest at death to the price specified in the agreement — preventing a higher appraised value from inflating the taxable estate.

Under IRC Section 2703, a buy-sell agreement only fixes estate tax value if it (1) is a bona fide business arrangement, (2) is not a device to transfer the business to heirs for less than full consideration, and (3) has terms comparable to those in arm's-length transactions between unrelated parties. Funding the buy-sell agreement with life insurance on each owner ensures that the purchase price is available in cash at the moment it's needed — without the surviving owners having to scramble for financing during an already difficult period.

Section 6166 Installment Payments

For estates where a closely held business interest exceeds 35% of the adjusted gross estate, IRC Section 6166 allows the estate to pay the estate taxes attributable to that business interest in installments over up to 14 years. The first four years are interest-only payments; principal payments begin in year five. The interest rate on the first $1.7 million (inflation-adjusted) of deferred tax is a preferential 2% rate; the remainder carries interest at 45% of the prime rate.

Section 6166 provides critical liquidity relief for estates with illiquid business assets — it prevents the forced sale of a family business to pay an estate tax bill. However, it requires careful monitoring: acceleration events (sale of the business, failure to maintain the qualifying business percentage, failure to make timely payments) can trigger immediate payment of the entire deferred tax balance.

Step-Up in Basis

Step-up in basis is one of the most valuable — and most frequently misunderstood — tax benefits in estate planning. It operates alongside, and sometimes in tension with, estate tax planning, requiring careful coordination to maximize your family's overall after-tax wealth.

How Step-Up in Basis Works

When you die holding appreciated assets, the income tax basis of those assets is "stepped up" to their fair market value as of the date of death under IRC Section 1014. Your heirs inherit those assets with this new, higher basis — meaning they can immediately sell the assets without paying capital gains tax on the appreciation that occurred during your lifetime.

Why Step-Up Matters for Planning

The step-up benefit creates a fundamental trade-off in estate planning: assets that are gifted during life do not receive a step-up — the recipient takes your carryover basis. Assets held until death receive a step-up. This means:

• Gifting low-basis, highly appreciated assets during life is generally tax-inefficient for the recipient — they inherit your low basis and will eventually pay capital gains on all the appreciation.
• Holding those same low-basis assets until death — even if it means paying some estate tax — may result in better overall after-tax outcomes if the capital gains avoided exceed the estate tax paid.
• The ideal candidates for lifetime gifts are assets with high fair market value relative to basis (i.e., minimal unrealized gain) but strong future appreciation potential, or assets that will receive valuation discounts.

Optimal Assets to Gift vs. Hold

Grantor Trusts and Basis Planning

Assets held in an irrevocable grantor trust do not receive a step-up in basis at the grantor's death, because — despite the assets being outside the estate for estate tax purposes — the trust is treated as owned by the grantor for income tax purposes. This means grantor trust assets retain the grantor's carryover basis, potentially resulting in capital gains taxes for trust beneficiaries when they eventually sell. Some estate plans deliberately "turn off" grantor trust status as assets age in the trust and embedded gains become material, allowing those assets to receive a step-up through other planning mechanisms. This is a nuanced area requiring ongoing monitoring.

Potential Legislative Changes

The step-up in basis has periodically been targeted for elimination or modification in legislative proposals. The Biden administration's 2021 tax proposals included a "recognition at death" regime under which unrealized gains would be taxed at death as if the decedent had sold all assets. While these proposals did not become law, the issue remains a recurring theme in tax policy debates. Comprehensive estate plans should be reviewed regularly in light of any legislative developments, as elimination of the step-up would fundamentally change the calculus for which assets to gift versus hold.

When to Work with a Professional

Estate tax planning spans multiple professional disciplines. The right team depends on the complexity of your situation, and for substantial estates, multiple advisors working in concert is the norm rather than the exception.

Complexity Thresholds: When You Need Professional Help

Not every estate requires a sophisticated planning team. Here's a practical guide to when each level of professional engagement is appropriate:

• Estate under $1 million: A well-drafted will, basic powers of attorney, and beneficiary designation review. An estate planning attorney for a basic package ($300–$800) is sufficient for most situations.
• Estate $1–7 million: A revocable living trust is often worthwhile for probate avoidance and incapacity planning. Annual gifting programs make sense. State estate tax planning may be critical depending on your state. An estate planning attorney and a CPA should be coordinating.
• Estate $7–15 million: You are under the 2026 federal $15,000,000 exclusion if the number is a single-person estate, but you may still face state estate tax, and a couple's combined picture can change with growth or a missed portability election. SLATs, GRATs, ILITs, and annual gifting may still be on the table. A full team of attorney, CPA, and financial advisor is strongly recommended.
• Estate above $15 million: All of the above, plus IDGTs, family limited partnerships, charitable planning, and ongoing administration. At this level, sophisticated planning should be a continuous, proactive process — not a one-time project.

Questions to Ask a Prospective Estate Planning Attorney

• What percentage of your practice is dedicated to estate planning and estate tax work?
• Do you regularly draft GRATs, SLATs, and IDGTs, or do you refer complex trust work to other attorneys?
• How do you coordinate with my CPA and financial advisor?
• What is your process for reviewing plans after major life events or tax law changes?
• Do you provide ongoing trust administration services, or will I need a separate trustee?

Finding the Right Attorney

Look for estate planning attorneys who are members of the American College of Trust and Estate Counsel (ACTEC) — a peer-elected organization of leading trust and estate lawyers — or who hold an LL.M. in Taxation or Estate Planning. These credentials signal meaningful specialization beyond general practice.