What Is Estate Tax Planning?

Estate tax planning is the discipline of structuring asset ownership, executing lifetime transfers, and establishing trust vehicles to reduce or eliminate the federal estate tax assessed on a deceased person's estate. Under IRC Section 2001, the federal estate tax applies at a rate of 40% on the taxable estate exceeding the applicable exclusion amount.

The applicable exclusion amount under IRC Section 2010(c) is $13.99 million per individual in 2025. For a married couple, the combined exclusion is $27.98 million. These figures are indexed annually for inflation by the IRS.

In addition to the federal estate tax, 12 states and the District of Columbia impose their own estate taxes, and 6 states impose inheritance taxes (as of 2025). State estate tax exemptions range from $1 million (Oregon, Massachusetts) to $13.99 million (Connecticut, which mirrors the federal amount). Estate tax planning must account for both federal and state-level exposure.

How Does Estate Tax Planning Work?

The federal estate tax under IRC Subtitle B applies to the gross estate (all assets owned or controlled at death) minus allowable deductions: debts, administrative expenses, charitable bequests under IRC Section 2055, and the unlimited marital deduction under IRC Section 2056. The resulting taxable estate is compared against the lifetime exemption under IRC Section 2010(c). Amounts above the exemption are taxed at 40%.

Three foundational planning concepts drive most estate tax strategies:

Lifetime gifting transfers assets during life, removing them and their future appreciation from the taxable estate. Under IRC Section 2503(b), the annual gift tax exclusion ($19,000 per recipient in 2025) and the lifetime exemption enable significant transfers without triggering gift tax. Each annual exclusion gift reduces the gross estate without consuming any lifetime exemption.

Irrevocable trusts such as GRATs under IRC Section 2702, IDGTs under IRC Sections 671-679, SLATs, and dynasty trusts under IRC Section 2631 remove assets from the estate while preserving various levels of access and control. Each vehicle has distinct tax treatment, risk profile, and administrative requirements.

Portability allows the surviving spouse to inherit the deceased spouse's unused estate tax exemption by filing IRS Form 706 (United States Estate Tax Return). Under IRC Section 2010(c)(4), portability ensures the couple's combined exemption is preserved even if assets were not evenly distributed between spouses. However, portability does not apply to the GST exemption, which requires separate trust planning.

When Do Entrepreneurs Use Estate Tax Planning?

Entrepreneurs face estate tax exposure at specific thresholds and during particular life and business events.

Estates approaching or exceeding the exemption require immediate planning. Business owners with total assets (including life insurance proceeds under IRC Section 2042, retirement accounts, and business value) above $13.99 million per person (2025) face direct estate tax exposure at the 40% federal rate.

Exemption sunset preparation is urgent in 2025. Under TCJA Section 11061, the current doubled exemption is scheduled to revert to approximately $7 million per person (indexed for inflation) on January 1, 2026. Entrepreneurs with estates in the $7 million to $14 million range face potential estate tax liability if the sunset takes effect as scheduled.

State estate tax exposure affects entrepreneurs in jurisdictions with lower thresholds. Oregon and Massachusetts impose estate taxes starting at $1 million. Connecticut, Hawaii, Illinois, Maine, Maryland, Minnesota, New York, Rhode Island, Vermont, Washington, and the District of Columbia each have their own exemption thresholds and rates. An entrepreneur below the federal exemption may still owe state estate tax.

Business succession planning addresses the liquidity risk when the primary estate asset is an illiquid business interest. Under IRC Section 6166, estate tax on closely held business interests can be deferred over 14 years, but the estate must qualify under specific ownership and asset percentage tests. Without planning, estate taxes on illiquid assets can force a sale of the business.

Life insurance review is essential because personally owned life insurance proceeds are included in the gross estate under IRC Section 2042. Moving policies to an ILIT removes the death benefit from the taxable estate, though the IRC Section 2035 three-year lookback rule applies to transferred policies.

How Does Dew Wealth Approach Estate Tax Planning?

Estate tax planning touches every element of the STEWARD framework, but the "Experienced Team" element is where most planning fails. Estate tax calculations involve projected asset growth, discount rate assumptions, legislative forecasts, and multi-state analysis. A single advisor working in isolation cannot model all the variables accurately.

The Linchpin Partner runs annual estate tax projections for each client, comparing the current estate tax exposure against multiple scenarios: exemption sunset under TCJA Section 11061, asset appreciation at various rates, and state relocation analysis. These projections drive vehicle selection and timing decisions across the client's entire wealth transfer strategy.

Dew Wealth coordinates between estate attorneys, CPAs, insurance specialists, and business valuation professionals to ensure all elements of the estate plan align. Each professional addresses a specific component: the attorney drafts trust documents, the CPA models tax scenarios, the insurance specialist structures ILITs, and the valuation professional appraises business interests for gifting and transfer purposes.

The primary risk in estate tax planning is legislative change. Congress can modify exemption amounts, tax rates, trust rules, and valuation standards. Dew Wealth structures plans that perform well under current law and remain functional under reasonably foreseeable legislative scenarios.