When we think about estate planning, we often focus on who will inherit what and how to ensure our loved ones are cared for. But another important part of the process is understanding how taxes may affect your estate and your beneficiaries. Without proper planning, a significant portion of your estate could go to taxes rather than to the people and causes you care about most. That’s why incorporating tax efficiency into your estate plan is essential — not just for high-net-worth individuals, but for anyone with real estate, retirement savings, or family heirlooms they want to pass on.
Let’s explore the key tax considerations that can influence your estate plan and how we can take proactive steps to reduce the burden.
Overview of Federal Estate and Gift Tax Thresholds
The federal government imposes an estate tax on the value of assets transferred upon death, but only if your estate exceeds a certain threshold. As of 2025, the federal estate tax exemption is approximately $13 million per individual (subject to legislative changes). That means most estates won’t owe federal estate tax — but those that do can face rates as high as 40% on the portion that exceeds the exemption.
In addition to the estate tax, the federal government also has a gift tax, which applies to transfers made during your lifetime. However, there are key exclusions that can be used strategically:
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Annual gift tax exclusion: You can give up to $18,000 per recipient per year (2025 amount) without triggering gift tax.
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Lifetime gift tax exemption: Gifts exceeding the annual exclusion count against your lifetime limit, which is unified with the estate tax exemption.
Understanding how these exemptions work — and how lifetime gifts affect your estate — is a crucial part of long-term planning.
State-Level Estate Taxes and How They Might Affect Your Plan
While many estates fall below the federal threshold, some states impose their own estate or inheritance taxes — and these can kick in at much lower levels.
If you live in a state like New York, Massachusetts, or Connecticut, your estate could be taxed even if it’s far below the federal exemption. These state estate tax exemptions often range from $1 million to $5 million, and the rates vary by state.
Here’s how this might impact your plan:
- Residency matters: Estate tax is generally determined by where you legally reside, but owning property in multiple states may subject your estate to additional scrutiny or tax filings.
- Relocation planning: For some, moving to a state without an estate tax later in life can significantly reduce the overall tax burden — but it’s important to establish clear residency for it to count.
- Proactive strategies: Techniques like gifting during your lifetime or using specific types of trusts can help minimize the state estate tax impact.
If you’re unsure whether your state imposes these taxes, or how your current estate would be affected, this is an area where legal guidance can really make a difference.
How Trusts Can Help Manage or Reduce Tax Burdens
Trusts are powerful estate planning tools that can help reduce estate taxes, avoid probate, and control how assets are distributed after your death. When structured strategically, certain types of trusts offer meaningful tax advantages:
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Credit Shelter Trusts (also known as Bypass Trusts) allow couples to maximize their combined estate tax exemptions.
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Irrevocable Life Insurance Trusts (ILITs) remove life insurance proceeds from your taxable estate, while still providing for beneficiaries.
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Grantor Retained Annuity Trusts (GRATs) can be used to transfer appreciating assets while minimizing gift taxes.
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Charitable Remainder Trusts (CRTs) allow you to generate income during your lifetime and donate the remainder to charity, often resulting in both income and estate tax benefits.
The right trust structure depends on your specific goals, assets, and family dynamics. By incorporating trusts into your estate plan, we can ensure more of your legacy stays intact for your loved ones.
Using Charitable Contributions for Tax-Efficient Planning
Philanthropy isn’t just a way to give back — it can also be a strategic component of your estate plan. Charitable giving can reduce the taxable value of your estate while supporting causes that matter to you.
Here are a few common approaches:
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Charitable Bequests: Leave a gift to a nonprofit in your will, reducing the size of your taxable estate.
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Donor-Advised Funds (DAFs): Make a charitable donation now, receive an immediate tax deduction, and distribute the funds to charities over time.
- Charitable Trusts: As mentioned above, CRTs and Charitable Lead Trusts (CLTs) can provide both income and estate tax benefits while supporting charitable organizations.
By aligning your estate planning with your charitable values, you can leave a meaningful legacy and reduce your family’s future tax burden.
Strategies for Minimizing Taxes on Inherited Assets
It’s not just your estate that may be taxed — your beneficiaries could also face tax implications based on the type of assets they inherit. That’s why we focus not only on transferring wealth, but doing so in the most efficient way possible.
Some strategies include:
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Taking advantage of step-up in basis: Most inherited assets like stocks or real estate receive a step-up in cost basis, which can eliminate capital gains taxes if sold soon after inheritance.
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Using Roth IRAs for tax-free growth: Unlike traditional IRAs, Roth IRAs allow for tax-free withdrawals by heirs, which can be a significant advantage.
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Structuring inheritances thoughtfully: For example, it may be better to leave tax-deferred accounts to beneficiaries in lower income brackets to reduce income taxes on required distributions.
Reviewing your assets and how they’re titled — and understanding the tax consequences of each — helps ensure your beneficiaries aren’t left with an unexpected bill.
Proactive Planning Protects Your Legacy
Understanding how taxes affect your estate plan is essential to making smart, informed decisions that protect your assets and your family’s future. The good news is that with proactive strategies and personalized guidance, it’s possible to significantly reduce or even eliminate certain tax burdens.
At Donohue, O’Connell & Riley, we help clients build tax-efficient estate plans that align with their financial goals and personal values. Whether you're just starting to plan or updating an existing estate plan, we're here to guide you through the process with clarity and care.
Contact Us to schedule a consultation and take the next step in protecting your legacy.
