How to Avoid Paying Too Much in Estate Tax

Planning your estate isn’t just for ultra-wealthy individuals anymore. With rising home values, growing retirement portfolios, and the sunset of generous federal exemptions on the horizon, more Americans are finding themselves on the edge of unexpected estate tax liability.

If you’re a mid-level professional approaching retirement, especially with assets in the $3 to 10 million range, you may think you’re safe. But in just a year, the estate tax exemption could drop by nearly half, pulling many middle- to upper-middle-income households into the taxable bracket overnight.

That’s why smart estate tax management goes beyond “tax savings.” It helps you gain control over what you pass on, how it’s used, and who ultimately benefits. You’ve spent a lifetime building your wealth. The right plan ensures it doesn’t quietly leak away in taxes, probate delays, or avoidable legal battles.

In this article, we’ll walk you through estate tax management tips that actually move the needle, whether your estate is worth $2 million or $20 million.

What is the current estate tax exemption?

As of 2025, the federal estate and gift tax exemption limit is $13.99 million per individual, with married couples effectively able to shield $27.98 million by combining their exemptions through portability and spousal filing.

However, this higher exemption level is only temporary. Under the Tax Cuts and Jobs Act, the threshold is set to expire on December 31, 2025. It will revert to approximately $5 million (indexed for inflation to around $7 million) per person on January 1, 2026.

What happens next remains uncertain. Legislative outcomes could shift the rules in any direction, but the risk of inaction is a real concern. Without a proactive estate plan, families may face avoidable tax burdens, increased complexity, and reduced control over how their wealth is passed on. Acting now allows you to take advantage of today’s favorable thresholds while they’re still available.

Smart strategies for estate tax planning

Even if you’re not yet brushing up against the federal estate tax exemption, proper planning today can prevent surprises tomorrow, especially as thresholds are poised to drop. Below are high-impact estate tax management tips that not only reduce your taxable estate but help you pass on assets with intention, flexibility, and minimal legal friction.

Each of these tools offers a way to shield wealth from taxation, with some approaches incrementally over time and others through significant strategic moves. The right mix depends on your goals, asset structure, and timing.

Let’s explore how they work.

     1. Use annual and split gifting

Each year, the IRS allows you to give $19,000 per recipient (as of 2025) without it counting against your lifetime estate and gift tax exemption. For married couples, this means you can gift up to $38,000 to a recipient per year tax-free.

Here’s a pro-tip. You can gift to anyone, including children, friends, and employees. Gifting during your lifetime allows assets to grow outside your estate and avoids the need to wait until death to initiate the transfer process.

     2. Front-load education with 529 superfunding

If education is part of your legacy plan, the “five-year election” rule for 529 college savings plans offers a powerful opportunity. It allows you to contribute five years’ worth of gifts upfront, and that’s $95,000 individually or $190,000 jointly to a single beneficiary’s 529 plan in one go.

Why does this matter?

Not only are 529 contributions generally exempt from federal estate tax, but the funds also grow tax-free and can be withdrawn tax-free for qualified education expenses. The sooner you fund them, the longer they grow.

Grandparents often use this to remove a significant chunk from their estate while helping a grandchild avoid student debt.

     3. Pay tuition and medical bills directly

Some of the best estate tax planning tools are also the simplest. The IRS allows you to pay unlimited amounts for someone else’s tuition or medical expenses, provided those payments go directly to the institution or provider.

These payments do not count as gifts. They don’t touch your annual exclusion or your lifetime exemption. And they can be made for as many people as you choose.

So, in practice, funding a loved one’s surgery, hospital stay, or private school tuition could reduce your estate by tens or even hundreds of thousands of dollars, without any tax filing at all.

     4. Use trust-based strategies to protect & transfer wealth

For more sophisticated estate planning tax strategies, trusts are your best friend. They help move significant assets out of your taxable estate while allowing you to define exactly how and when your beneficiaries can use them.

Here are a few of the most effective options:

• Irrevocable Life Insurance Trust (ILIT): Owns your life insurance policy so that proceeds don’t count as part of your estate. This is essential if your total estate (including insurance payouts) may cross the exemption limit. Just make sure the policy is transferred well before death to avoid the IRS’s three-year rule.
• Grantor Retained Annuity Trust (GRAT): Allows you to transfer appreciating assets to heirs while keeping an annuity stream for yourself. Any growth above the IRS’s assumed rate goes to your beneficiaries, often tax-free.
• Qualified Personal Residence Trust (QPRT): Transfers your home to heirs at a discounted value while letting you continue living in it for a set term. Ideal for those who own a high-value property that’s likely to appreciate over time.
• Bypass Trusts/Dynasty Trusts: These preserve the use of both spouses’ exemptions and allow assets to pass through multiple generations without being taxed again at each subsequent generation. Especially useful if your state also imposes estate or inheritance taxes.

While these trusts are powerful tools, they are fairly complex. They require legal structuring, trustee appointments, and careful compliance. However, for estates valued above $5 million, they can provide long-term protection and control that simpler strategies cannot offer.

It may be worthwhile to engage a financial advisor who can guide you through the right trust options and make sure everything is set up properly.

     5. Use life insurance strategically

Many people underestimate the impact of life insurance on their estate and tax exposure. If you retain any “incidents of ownership” in a policy (such as the right to change the beneficiary or borrow against it), the IRS may include the full death benefit in your taxable estate.

The solution?

Move ownership to an Irrevocable Life Insurance Trust (ILIT) or another party. This ensures that the death benefit is paid tax-free to your heirs and remains outside the estate.

However, here is an important caveat to be mindful of. If you transfer an existing policy and pass away within three years, the IRS may still pull it back into your estate. That’s why many people purchase the policy directly within the trust to avoid this lookback period altogether.

     6. Don’t overlook portability

If your spouse passes away first, their unused federal estate tax exemption doesn’t disappear, as long as you file Form 706 on time. This election, known as portability, allows the surviving spouse to carry forward any remaining exemption.

It might not seem necessary if your estate is modest today. But things change. Over the next 10 to 20 years, your assets are likely to grow significantly. You may inherit additional property or see your investments appreciate beyond your expectations.

Filing Form 706 within nine months of your spouse’s death preserves the unused exemption at current levels, even if those levels are reduced in the future. It’s a straightforward step that can provide substantial estate tax protection in the future.

Coordinating federal and state estate tax planning

It’s easy to focus solely on federal estate tax rules, but if you live (or own property) in certain states, you might owe estate tax even if you’re well below the federal threshold.

Currently, 12 states and the District of Columbia impose estate taxes, often with exemption levels that are significantly lower. For example, Massachusetts and Oregon tax estates start at just $1 million, and Illinois begins at around $4 million. These thresholds haven’t kept pace with inflation, meaning more middle-class estates are falling into their net each year.

What’s worse?

There’s no portability at the state level. Even if your spouse’s unused exemption goes forward federally, that protection often doesn’t extend to state calculations.

If you’re planning across multiple states, whether through owning property, splitting time between homes, or simply relocating in retirement, here are some focused estate tax management tips to keep your plan airtight:

Tip #1: Review your legal domicile carefully

Where you legally reside (not just where you vacation or spend most of your time) can impact how your estate is taxed. In some cases, establishing domicile in a low- or no-tax state, such as Florida or Texas, can reduce or eliminate state estate tax exposure.

Tip #2: Take advantage of state-specific credits and exemptions

Some states allow deductions or credits for closely held businesses, farmland, or spousal transfers. Others allow limited lifetime gifting strategies that help reduce exposure before death.

Tip #3: Strategically gift high-value state-taxable assets during your lifetime

Lifetime gifts often escape estate taxes at the state level, even when they may count federally. Moving appreciated property to beneficiaries before death, when done correctly, can minimize both income and estate taxes.

In multi-state scenarios, planning becomes not just smart but essential. Ignoring state estate tax rules could mean writing a check to the state treasury that could’ve easily been avoided with advance planning.

Tying it all together strategically

Estate tax planning isn’t about any one tactic, but how you orchestrate. For your plan to actually work, the bigger moves and the smaller decisions must align and stay current.

At the macro level, your federal strategy should include:

• Annual gifting to gradually reduce your estate’s value
• Trust structuring to remove appreciating assets from your taxable base
• Life insurance planning to avoid inflating your estate unnecessarily
• Portability elections to preserve your spouse’s unused exemption

These foundational tools help preserve your exemption and minimize overall exposure, not just today, but over the course of decades.

At the micro level, your day-to-day planning should include:

• 529 superfunding to transfer wealth early while benefiting education
• Direct medical or tuition payments to reduce your estate without tax impact
• Liquidity analysis to ensure your heirs can pay any taxes due without selling assets in distress

It’s not enough to set this in motion once. The best estate tax plans are living systems, adjusted periodically based on changes in tax law, shifts in asset values, and key life events such as marriages, divorces, or the birth of grandchildren.

A yearly check-in with your estate planning financial advisor ensures you’re compliant and optimized.

Looking beyond taxes and planning your estate with purpose

Estate tax planning is only one layer. A well-crafted estate plan isn’t just about reducing taxes. It’s about preserving your values, protecting your loved ones, and giving your wealth a purpose.

When done well, estate planning ensures:

• Smooth family transitions: Avoiding probate means your assets pass more quickly, privately, and with a lower chance of conflict. The right structures help maintain family harmony even in emotionally charged moments.
• Protection through life’s changes: If you have a child with special needs, a second marriage, or minor grandchildren, tailored planning ensures the people you love are provided for, not left in limbo.
• Alignment with your personal values: Maybe you want to donate to a cause you believe in. Perhaps you want your grandkids to use their inheritance for education, rather than a new car. Trusts and bequests can reflect that, while still staying tax-efficient.

Ultimately, estate tax planning should be married to your broader legacy goals. Not every dollar needs to be tax-sheltered, but every decision should be intentional because your estate is a statement of what mattered to you.

Don’t wait until laws change or you’re overwhelmed

Estate tax planning isn’t something to shelve for “someday.” Exemptions are shifting, thresholds are tightening, and the clock is ticking. The sooner you act, the more control you have, not just over taxes, but over your entire legacy. Here are the following steps:

• Run a full estate tax gap analysis comparing your current estate value to federal and state thresholds.
• Plug smart leak holes, set up trusts, gifts, and strategies while current exemptions remain in place.
• Schedule consistent reviews as life changes, and revisit your estate plan at least every few years.
• Document it clearly and ensure beneficiaries and fiduciaries understand the structure and intentions.

Lastly, estate planning may not be an ideal solo endeavor. A qualified estate planning financial advisor brings critical expertise, balancing tax optimization, trust structuring, asset protection, and your personal goals. If you’re serious about minimizing taxes and maximizing your legacy, now is the time to explore their services.

Use our free advisor match tool to get matched with 2 to 3 financial advisors who can best fulfill your financial requirements.