Estate and Gift Tax Planning in 2025: What Trustees and Families Need to Know

Estate taxes can significantly reduce the wealth you hope to pass on to your heirs. Fortunately, proactive planning allows you to minimize or even avoid these taxes. This updated guide reflects the estate and gift tax landscape as of August 2025, including recent federal law changes. It explains the basics of federal estate and gift taxes, highlights state‑level considerations, and outlines strategies to reduce your taxable estate while preserving assets for future generations.

Understanding Federal Estate and Gift Taxes

The United States taxes the transfer of wealth both at death (through the estate tax) and during life (through the gift tax). These taxes share a unified credit, meaning transfers made during life reduce the amount that can pass tax‑free at death. Key points as of August 2025 include:

Federal Lifetime Exemption

• 2025 exemption: For decedents dying in 2025, the federal estate and gift tax exemption (also called the “basic exclusion amount”) is $13.99 million per person and $27.98 million for married couples. This amount unifies both the estate tax and gift tax; taxable gifts made during life will reduce the amount available at death.

• Annual indexing: The exemption is indexed annually for inflation.

• Changes for 2026: The Tax Cuts and Jobs Act (TCJA) originally scheduled the exemption to drop to about $7 million per person in 2026. However, the One Big Beautiful Bill Act (OBBBA) signed on July 4 2025 changed the trajectory. Under the OBBBA, the federal estate and gift tax exemption increases to $15 million per person ($30 million per married couple) starting January 1 2026, with annual inflation adjustments thereafter. The OBBBA makes this increase “permanent,” although a future Congress could still change the law.

Unified Credit and Portability

• Unified credit: Because the estate and gift tax share one lifetime exemption, large gifts made during life will reduce the amount available to shelter transfers at death.

• Portability: If one spouse dies without using the entire exemption, the surviving spouse can elect to “port” the unused amount by timely filing a federal estate tax return (Form 706). This election effectively increases the survivor’s exemption. Failing to file can forfeit the deceased spouse’s unused exemption.

Annual Gift Tax Exclusion

• For 2025, you may gift up to $19,000 per recipient without using any of your lifetime exemption or filing a gift tax return. Married couples can jointly gift $38,000 per person each year.

• Gifts above the annual exclusion amount reduce your remaining lifetime exemption. Gifts to a non‑citizen spouse are subject to a higher annual exclusion ($190,000 in 2025).

Tax Rates and Step‑Up in Basis

• Estate tax rate: Federal estate and gift taxes are imposed at graduated rates up to 40 percent. Only the portion of an estate exceeding the exemption is taxed.

• Step‑up in basis: Assets included in your taxable estate receive a step‑up in basis to their fair market value at death. This eliminates capital gains tax on pre‑death appreciation for your heirs, an important consideration when deciding whether to gift assets during life or at death.

Generation‑Skipping Transfer (GST) Tax

The GST tax applies to transfers to “skip persons,” such as grandchildren or unrelated individuals more than one generation younger than you. The GST exemption amount matches the estate and gift tax exemption (i.e., $13.99 million in 2025; $15 million starting in 2026).

State Estate and Inheritance Taxes

In addition to federal taxes, some states impose their own estate or inheritance taxes, often with much lower exemption amounts than the federal level. State estate taxes are paid by the estate before distribution; inheritance taxes are paid by beneficiaries. States with estate taxes include Massachusetts, Oregon, Washington, Connecticut, New York and others, while states with inheritance taxes include Pennsylvania, Maryland and Nebraska. Exemption amounts and rates vary; for example, Washington’s exemption increased to $3 million per person in 2025. Many states do not allow portability of unused exemption.

If you live in or own property in a state with its own tax, you must account for potential state estate or inheritance taxes in your planning. Relocating to a state without such taxes may reduce your exposure, but you must consider residency requirements, lifestyle implications and other state tax rules. Transferring property to irrevocable trusts or holding assets in states without estate taxes are other strategies to consider.

Strategies to Reduce Your Taxable Estate

Effective estate planning not only reduces estate and gift taxes but also ensures your assets reach your intended beneficiaries. The following strategies remain relevant in 2025 and will continue to be useful after the OBBBA changes take effect.

1. Make Use of Annual Exclusion Gifts

The annual exclusion allows you to transfer wealth each year without eroding your lifetime exemption. For example, if you and your spouse have three children and two grandchildren, you can collectively gift $38,000 to each person per year, transferring $190,000 annually out of your estate without touching your lifetime exemption. Gifts can be in cash, marketable securities or interests in a family business. You can also “front‑load” contributions to 529 education savings plans by making five years’ worth of exclusion gifts at once.

2. Make Strategic Use of the Lifetime Exemption

With the OBBBA permanently raising the lifetime exemption to $15 million per person in 2026, individuals who were considering large gifts before 2026 now have additional time. However, using the exemption during life can still make sense when:

• You wish to transfer assets that are likely to appreciate significantly (e.g., business interests or real estate) so future growth occurs outside your estate.

• You want to take advantage of valuation discounts (see below) or freeze asset values using sophisticated trusts such as Grantor Retained Annuity Trusts (GRATs) or Intentionally Defective Grantor Trusts (IDGTs).

Remember that gifts during life carry a carryover basis, so recipients may owe capital gains tax when they sell; weigh estate tax savings against potential income tax consequences.

3. Pay Tuition and Medical Expenses Directly

Under the federal rules, payments made directly to educational institutions or medical providers for someone else’s benefit are unlimited and do not count against your annual or lifetime gift tax exclusions. This strategy helps loved ones while reducing your taxable estate.

4. Use Life Insurance and Irrevocable Life Insurance Trusts (ILITs)

Life insurance proceeds are part of your taxable estate if you own the policy. By transferring a policy into an ILIT, you remove the death benefit from your estate. You contribute cash gifts to the ILIT (using annual exclusions) to pay premiums. At your death, the trust receives the tax‑free proceeds and can provide liquidity to pay estate taxes or support beneficiaries.

5. Grantor Retained Annuity Trusts (GRATs)

GRATs let you transfer appreciation on an asset to beneficiaries with minimal gift tax cost. You place assets (often high‑growth investments) in a trust and retain a stream of annuity payments for a fixed term. The gift value is the difference between the asset’s value and the present value of the retained annuity, often resulting in a small taxable gift. If the assets outperform the IRS’s assumed growth rate (Section 7520 rate), the excess passes tax‑free to your beneficiaries when the trust term ends.

6. Qualified Personal Residence Trusts (QPRTs)

A QPRT allows you to transfer a residence or vacation home to your heirs while retaining the right to live there for a specified term. Because you give up future use, the taxable gift value is discounted. QPRTs work best when property values are expected to appreciate and interest rates are high (which reduces the gift’s value). Be sure the trust term is realistic; if you die during the term, the property may be pulled back into your estate.

7. Family Limited Partnerships (FLPs) and LLCs

Family limited partnerships or LLCs let you retain management control while transferring non‑controlling interests to family members at discounted values due to lack of control and marketability. These discounts reduce the taxable value of gifts. For example, transferring a $5 million apartment building into an FLP and giving limited partnership interests to children may reduce the taxable value of the gift while keeping management within the senior generation.

8. Spousal Lifetime Access Trusts (SLATs)

A SLAT involves one spouse funding an irrevocable trust for the benefit of the other spouse (and potentially descendants), using his or her lifetime exemption. The beneficiary spouse can access trust distributions as long as the couple remains married. This removes the assets and future growth from both estates while still benefiting the family. Caution: divorce or the beneficiary spouse’s death may limit access to the trust.

9. Charitable Giving and Charitable Trusts

Charitable gifts reduce your estate and often provide current income tax deductions. Options include:

• Direct gifts to charity during life or at death.

• Charitable Remainder Trusts (CRTs): You or other non‑charitable beneficiaries receive income for life or a term of years. The remainder goes to charity. CRTs can defer capital gains taxes and reduce estate taxes while supporting causes you care about.

• Charitable Lead Trusts (CLTs): The charity receives income for a term; the remainder goes to your heirs. CLTs can remove appreciating assets from your estate and generate income tax deductions.

10. Credit Shelter (Bypass) Trusts for Married Couples

Even with portability, married couples may benefit from credit shelter trusts. At the first spouse’s death, assets up to the exemption amount are placed in a trust benefiting the surviving spouse and children. The trust assets grow outside the surviving spouse’s estate, ensuring they aren’t taxed at the second death. Credit shelter trusts can protect appreciation and hedge against changes in tax law.

11. Valuation Discounts and Intra‑Family Sales

When transferring interests in privately held businesses, you may qualify for valuation discounts because minority interests lack control and marketability. These discounts can reduce gift or estate taxes. Advanced strategies such as selling assets to an Intentionally Defective Grantor Trust (IDGT) freeze the value of your estate while transferring future growth to heirs. The grantor continues to pay income tax on the trust’s income, further reducing their taxable estate.

Income Tax Considerations

Estate planning isn’t just about estate taxes. You must also consider income taxes:

• Appreciated assets: Gifting appreciated property during life carries over your basis to the recipient, meaning they will owe capital gains tax on the full appreciation when they sell. By contrast, passing the asset at death gives heirs a step‑up in basis, eliminating gains that occurred during your lifetime.

• Retirement accounts: Tax‑deferred accounts (IRAs, 401(k)s) are included in your taxable estate and are subject to income tax when beneficiaries withdraw funds. Roth conversions may be beneficial to reduce future tax burdens.

• State income taxes: Some states tax trust income at high rates. Establishing trusts in states with favorable tax treatment (e.g., Delaware, Nevada) can reduce income tax burdens.

Staying Current with Changing Laws

Tax laws evolve. In 2024 and early 2025, many planners feared the exemption would revert to about $7 million in 2026. The One Big Beautiful Bill Act passed in July 2025 has, for now, eliminated that immediate threat by making the $15 million per person exemption permanent starting in 2026. Still, Congress and future administrations could revise these rules. To stay ahead:

• Monitor legislation: Keep informed about tax proposals and changes to the estate, gift and GST taxes.

• Use flexible planning tools: Trusts with powers of appointment, decanting provisions and trustees with discretionary powers offer flexibility to adapt to new laws.

• Review your plan regularly: Major life changes (marriage, divorce, birth of children) and tax law changes warrant a review. Consider updating beneficiary designations, wills, trusts and powers of attorney.

Common Mistakes and How to Avoid Them

1. Procrastination: Waiting too long to plan can reduce your options. Start early to take advantage of high exemptions and avoid hasty decisions.

2. Not filing a portability election: If a spouse dies, failing to file Form 706 within nine months (or with extension) forfeits the deceased spouse’s unused exemption. File even when no tax is owed.

3. Gifting the wrong assets: Giving away highly appreciated assets may create large capital gains taxes for recipients. Consider whether to gift cash or assets with minimal appreciation and hold onto assets with low basis until death for a step‑up.

4. Ignoring state taxes: States with estate or inheritance taxes can impose significant liabilities. Factor state rules into your planning or consider relocating.

5. Improper trust funding: Creating trusts without transferring assets into them defeats the purpose. Ensure deeds, account titles and beneficiary designations reflect the trust’s ownership.

6. Failing to coordinate retirement accounts and life insurance: Estate, gift and income tax planning must integrate retirement designations and insurance policies.

7. DIY mistakes: Estate tax planning is complex. Using generic templates without professional advice can lead to costly errors or missed opportunities.

Frequently Asked Questions (Updated August 2025)

What is the difference between estate tax and inheritance tax?

The federal estate tax is levied on the total value of a decedent’s estate before distribution. Inheritance tax, imposed by a few states, is levied on the amount each beneficiary receives.

Has the estate tax exemption dropped in 2026?

No. The One Big Beautiful Bill Act enacted in July 2025 prevents the scheduled reduction. Instead, the federal exemption increases to $15 million per person in 2026 with no scheduled sunset. Because Congress can always change the law, continued vigilance is warranted.

How does portability work?

Portability allows a surviving spouse to use the unused estate tax exemption of the deceased spouse by filing an estate tax return (Form 706). The election must be made within nine months of death (plus extensions) and does not apply to the generation‑skipping transfer tax exemption.

Why use a charitable trust instead of leaving assets directly to charity?

Charitable trusts can provide lifetime income to you or your heirs while benefiting a charity at the end of the term. This structure can generate income tax deductions, reduce estate taxes and diversify assets. A direct gift to charity at death is simpler but may not offer these dual benefits.

Should I move to a state without estate tax?

Relocating can reduce state estate taxes, but consider family ties, lifestyle and state income taxes. Some states have residency requirements or “clawback” rules. Always consult advisors before moving solely for tax reasons.

Conclusion

Minimizing estate and gift taxes requires foresight, knowledge of complex laws and coordination with your overall financial and family goals. As of August 2025, the federal exemption remains at a historically high $13.99 million per person, with a permanent increase to $15 million per person in 2026. However, uncertainties in tax policy mean it’s still wise to implement strategies that preserve wealth. Whether you’re making annual exclusion gifts, setting up sophisticated trusts or leveraging valuation discounts, work closely with estate planning attorneys, tax professionals and financial advisors. By acting now and reviewing your plan regularly, you’ll maximize tax efficiency and ensure a meaningful inheritance for generations to come.