Can Estate Planning Really Reduce My Taxes?

When people think about estate planning, they often picture wills, guardianship, or family decisions after someone passes away. But there’s another side of estate planning that doesn’t get as much attention—and it starts long before anything happens to your health.

Tax planning

Estate planning can play a significant role in reducing your tax burden, both during your lifetime and for your heirs after you’re gone. With the right strategies in place, you can minimize what’s owed to the IRS, protect your assets, and ensure more of your wealth goes where you want it to—not into government coffers.

Let’s break down the differences and the most important ways estate planning and estate tax planning intersect.

Understanding the Common Tax Burdens in Estate Transfers

When someone passes away, their estate may be subject to different types of taxes depending on the size of the estate, the type of assets involved, and where they live.

Here are the most common taxes people encounter during estate transfers:

1. Federal Estate Tax

• Imposed on estates exceeding a certain value (currently $13.99 million per person in 2025, increasing to $15 million per person starting January 1, 2026 under the One Big Beautiful Bill)
• Anything above the exemption amount is taxed—up to 40%.
  

2. State Estate or Inheritance Taxes

• Some states levy additional estate or inheritance taxes with much lower exemption thresholds. For example, states like Oregon and Massachusetts tax estates starting at $1 million.
• Some other states, such as Michigan, Kansas, Florida or California, do not have an estate or death tax.
  

3. Capital Gains Tax

• Applies when assets like real estate or investments are sold.
• Beneficiaries generally receive a “step-up in basis,” which reduces capital gains on inherited property—but there are exceptions if planning is mishandled.
  

Quick Note: Your heirs may not face an estate tax bill at all if your assets are under the federal and state exemption levels. But for high-net-worth individuals—or those with valuable property or businesses—proactive planning makes a big difference.

Tools That Can Help: Trusts, Gifting, and Tax-Smart Strategies

You don’t have to be a financial wizard to reduce taxes. You just need the right tools and some thoughtful timing.

Revocable and Irrevocable Trusts

Trusts are one of the most powerful estate planning tools—and they can serve a dual purpose:

• Revocable Trusts help avoid probate and offer privacy, but don’t protect against estate taxes.
• Irrevocable Trusts remove assets from your taxable estate, which can reduce or eliminate estate tax—but once placed in the Trust, the assets generally can’t be taken back.
  

Example: If you move a life insurance policy into an Irrevocable Life Insurance Trust (ILIT), the death benefit won’t be counted in your estate’s value.

Annual Gifting

You’re allowed to give a certain amount each year to individuals without triggering gift taxes.

• Since 2024, the limit has been $18,000 per recipient.
• Gifts don’t count toward your lifetime estate tax exemption.
• A couple could gift $36,000 per year to each child or grandchild—reducing the size of their estate while helping loved ones now.
  

Charitable Giving

Donations to qualified charities can reduce your taxable estate and may also provide income tax benefits during your lifetime.

• Charitable remainder trusts, donor-advised funds, and outright gifts can all be part of a tax-efficient giving strategy.
  

What You Need to Know About Exemptions and Portability

The federal estate tax exemption isn’t permanent—and understanding how it works is key to smart planning.

Current Landscape

While the federal estate tax exemption is increasing in 2026 under the One Big Beautiful Bill (OBBB), it’s important to understand that this amount may not remain unchanged indefinitely. Though the new exemption is slated to be indexed for inflation, future legislation could reduce it or significantly alter estate tax policy.

This makes 2025 a critical window for high-net-worth individuals to review and act on their estate plans before the new rules take effect.

Why this matters: Laws can change quickly, and exemption levels are a moving target. Planning now with flexibility in mind allows you to lock in current benefits and adapt as tax policy evolves.

Portability for Married Couples

The IRS allows portability, meaning if one spouse dies without using their full exemption, the surviving spouse can claim it—effectively doubling their own.

Key point: You must file a federal estate tax return after the first spouse's death to elect portability, even if no tax is owed.

Final Thought: Tax-Smart Planning Is Future-Proof Planning

Estate planning isn’t just about who gets what—it’s about how much they actually receive after taxes. From high-value real estate to family-owned businesses, the assets you’ve worked hard to build can be eroded by taxes without careful planning.

The good news? With the right strategies—trusts, gifting, charitable planning, and understanding how the tax code works—you can significantly reduce what your estate owes and preserve more for the people and causes you care about.

Bottom line: estate planning can absolutely reduce your tax burden. The sooner you start, the more flexibility and control you’ll have. If you are ready to take the first step, schedule a free consultation with David today.