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Estate Tax Planning

The strategic process of structuring asset ownership, gifting programs, and trust vehicles to minimize or eliminate the federal estate tax (currently 40% on amounts exceeding the exemption) and any applicable state estate or inheritance taxes.

Concept Source: generalized Verified: 2026-04-07

Definition

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. The federal estate tax applies at a rate of 40% on the taxable estate exceeding the applicable exclusion amount ($13.99 million per individual in 2025). For a married couple, the combined exclusion is $27.98 million.

In addition to the federal estate tax, some states impose their own estate or inheritance taxes, often at lower exemption thresholds. Estate tax planning must account for both federal and state-level exposure.

How It Works

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

Three foundational planning concepts drive most estate tax strategies:

Lifetime gifting: Transferring assets during life removes them (and their future appreciation) from the taxable estate. The annual exclusion ($19,000 per recipient in 2025) and the lifetime exemption enable significant lifetime transfers without triggering gift tax.

Irrevocable trusts: Vehicles such as GRATs, IDGTs, SLATs, and dynasty trusts remove assets from the estate while preserving various levels of access and control.

Portability: When the first spouse dies, any unused portion of their estate tax exemption can be transferred to the surviving spouse by filing an estate tax return (Form 706). Portability ensures that the couple's combined exemption is not wasted, even if assets were not evenly distributed between spouses.

When Entrepreneurs Use This

Estates approaching or exceeding the exemption: Business owners with total assets (including life insurance, retirement accounts, and business value) above $13.99 million face direct estate tax exposure
Exemption sunset preparation: The current doubled exemption is scheduled to revert to approximately $7 million (indexed for inflation) after 2025, making estate tax planning urgent for estates in the $7 million to $14 million range
State estate tax exposure: Entrepreneurs in states with lower thresholds (Connecticut, Massachusetts, Oregon, and others impose estate taxes starting at $1 million to $5.49 million) need state-level planning even if the federal exemption covers them
Business succession: Estate taxes on illiquid business interests can force a sale; proactive planning prevents this outcome
Life insurance review: Personally owned life insurance adds to the gross estate; moving policies to an ILIT eliminates this exposure

Dew Wealth Perspective

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, asset appreciation, state relocation). These projections drive vehicle selection and timing decisions across the client's entire wealth transfer strategy.

Frequently Asked Questions

Will the estate tax exemption really decrease after 2025?

Current law schedules the exemption to revert to approximately half its current level (adjusted for inflation) on January 1, 2026. Congress could extend, modify, or accelerate this change. Planning should account for both scenarios.

Does portability replace the need for trusts?

No. Portability transfers the unused exemption but does not protect the exemption from estate tax on future growth. Assets placed in a bypass trust at the first spouse's death grow outside both spouses' estates. Portability is a safety net, not a substitute for trust planning.

What if my estate is below the exemption?

Even below the federal threshold, state estate taxes, future asset growth, and the potential exemption sunset could create exposure. An annual review ensures the plan adapts to changing circumstances.

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