Most people have at least a basic understanding of how income taxes, property taxes, and sales taxes work. But, for high-net-worth Americans, there’s another set of taxes to worry about: wealth transfer taxes. These taxes are much less well understood. The most important wealth transfer tax is the federal estate tax, but there’s also a federal gift tax, a federal generation-skipping transfer tax, and state-level taxes. These taxes are significant, but they can be avoided to a great extent with proper planning. This article provides an overview of how these taxes work, how estate tax planning can mitigate them, and some common approaches to mitigating these taxes.

The Federal Estate Tax

The estate tax is a tax on the assets that a person leaves to their heirs when they pass away. The estates of U.S. citizens and residents are taxed on all of their worldwide assets — including real estate, retirement accounts, brokerage accounts, crypto, intellectual property, and whatever else a person owns. The federal estate tax rate is a flat 40%, and any tax is due within nine months of a person’s death.

There are three important exceptions to the estate tax.

First, each individual has a basic exclusion amount, sometimes called a lifetime exemption. The exemption is large; it’s the reason most Americans never owe any estate tax. In 2025, the exemption is $15 million. It is adjusted for inflation, so it usually increases on January 1.

Second, amounts left to a person’s U.S. citizen spouse are not taxed. This prevents a surviving spouse from having to sell the family home or business to pay estate tax. However, when the surviving spouse dies, his or her estate (including the amount inherited from the deceased spouse) will be subject to estate tax.

Third, amounts left to charity are not taxed. Warren Buffett says he plans to leave the vast majority of his fortune to charity when he dies. That means that Buffett’s estate won’t be subject to much estate tax. Of course, most people want to leave the bulk of their estates to their family members.

It’s hard to overstate how important estate tax planning is for high-net-worth people. The federal estate tax is a serious obstacle to intergenerational wealth transfers. Under current law, the estate of a New Yorker who dies with $30 million in 2026 will owe around $10 million of state and federal estate tax. And yet, the estate of a billionaire New Yorker who dies in 2026 after doing careful estate tax planning may owe very little. That’s the power of estate tax planning.

The Federal Gift Tax

The federal gift tax is a tax on gifts made during the transferor’s lifetime. It applies when the transferor is a U.S. citizen or resident. It also applies to non-resident aliens who transfer U.S. situs property, such as a house in Florida. Like the federal estate tax, it is levied at 40%, and it shares the same $15 million exemption amount with the estate tax. So, if you use $3 million of your gift tax exemption during your lifetime and you die in 2025, your estate tax exemption will be $13 million.

The Generation-Skipping Transfer Tax

The gift tax and the estate tax are functionally a single, unified tax: the gift tax applies to lifetime gifts and the estate tax applies to transfers upon death. But there’s a separate, second layer of federal tax, called the generation-skipping transfer (GST) tax, that applies to transfers to members of generations after your children’s generation (grandchildren, for example). The generation-skipping transfer tax also applies to transfers to non-family members who are 37.5 years or more younger than the donor. This tax is also levied at a rate of 40%, which means transfers to your grandchildren could be subject to an effective tax rate far in excess of 50%, even if you live in a low-tax state like Texas. Like the gift and estate tax exemption amount, the generation-skipping transfer tax exemption amount is $15 million in 2025.

Let’s assume you have used your full lifetime gift and GST exemption of $15 million and have $10 million that you want to gift to your heirs. If you directly gift that amount to your children, it will be subject to a 40% estate tax, leaving $6 million for your kids. If, instead, you gift that $10 million to your grandkids, it will be subject to a 40% estate tax and a 40% GST tax, leaving only $5 million for your grandkids! Fortunately, with proper estate planning that incorporates some of the solutions mentioned later in the article, you should be able to avoid most (or all) of those transfer taxes.

State-Level Taxes

There are three types of state-level wealth transfer taxes. The most significant variety are the state-level estate taxes. Twelve states and the District of Columbia have state estate taxes. They apply to anyone who dies a resident of one of those states and is over the state’s exemption amount. They can also apply to non-residents who own property in one of those states. Most of these states have very low exemption amounts, much lower than the federal exemption amount. Oregon’s estate tax exemption amount is only $1,000,000. Unlike the federal estate tax, which is flat, state estate taxes tend to be progressive, beginning at rates as low as 0.80% and reaching as high as 20% in Hawaii and Washington State. Because the federal government provides a federal estate tax deduction for state estate taxes paid, effective combined federal/state estate tax rates top out at 52%.

Six states impose an inheritance tax. (Maryland is the only state that imposes both an estate tax and an inheritance tax.) Unlike an estate tax, which applies to the net value of the assets in a deceased person’s estate, an inheritance tax applies to the amount transferred to a given beneficiary. Inheritance tax rates can reach as high as 18%, but there are so many exclusions that in practice these taxes only apply in rare situations.

Finally, Connecticut imposes its own gift tax. Because Connecticut conforms to the federal gift tax exemption amount, this tax only applies to gifts that are already subject to federal gift tax. No other state currently imposes a gift tax.

Estate Tax Planning 101: Using Your Exemption During Life

Making lifetime gifts is almost always than not making lifetime gifts, assuming you are going to be above the estate tax exemption amount. There are a few reasons for that, but the most significant, and easiest to grasp, is that gifted assets are able to appreciate outside of the donor’s taxable estate. So, for example, if you have an asset that is currently worth $1 million but will be worth $10 million in a decade, you can either give it away now and use $1 million of gift tax exemption, give it away in a decade when doing so will use $10 million of exemption, or hold onto it until you die, at which point it could be worth tens of millions of dollars. From a gift and estate tax planning perspective, you want to use as little exemption as possible, and that means giving the asset away now.

There’s another major reason to make lifetime gifts sooner: to “lock in” the current exemption level before it may drop. By making gifts now, individuals can lock in the current, elevated exemption amount before it is cut in half. Locking in that additional exemption could save a donor’s heirs tens of millions of dollars. There’s little risk in doing so, because the IRS has said that gifts made before the end of 2025 will be protected from future “clawbacks.” 

Now you may be wondering what are the best ways to gift assets during your life (or before 2026). Below, we go into some of the strategies wealthy families use to pass assets on to future generations while minimizing transfer taxes!

Why Irrevocable Trusts Are So Powerful

There are lots of different estate tax planning strategies, but they almost all involve at least one irrevocable trust. That’s because irrevocable trusts are ideal vehicles for receiving gifted assets. Here are the four biggest advantages of gifting assets to irrevocable trusts rather than making outright gifts:

• Asset Protection. In the United States, litigation is one of the biggest risks to wealth preservation. A lawsuit can undo years of savvy financial management. Because an irrevocable trust is a separate legal person, it is generally not subject to liability for actions taken by a trust’s grantor or beneficiary. So the grantor’s or beneficiary’s creditors won’t be able to access the trust’s assets even if they win their lawsuit against the grantor or beneficiary. In addition to protecting assets from lawsuits, irrevocable trusts can help shield inherited assets from a divorcing spouse.
• Estate Tax Savings. As described above, irrevocable trusts can remove future asset appreciation from a donor’s estate. But that’s just the beginning of how trusts can save estate tax. Certain trusts can move assets out of a donor’s estate without using any gift tax exemption. Some trusts can borrow assets, without generating income tax liability in the process, which can shift additional appreciation out of the donor’s estate. In other trusts, donors may be able to pay the income taxes on trust income without using their gift exemption, shifting additional assets out of the donor’s estate. But most importantly, irrevocable trusts can be drafted so that they’re not part of the beneficiaries’ estates either. Assets that remain in trust can exist in a type of tax no-man’s land, outside of anyone’s estate, for generations.
• Potential Income Tax Savings. Any trust that outlives its donor will eventually become what’s known as a non-grantor trust. Non-grantor trusts have various income tax advantages relative to individuals. For example, they can be situated in states with no income taxes. And due to the unique way that non-grantor trusts are taxed, the trustee can control whether taxes are paid at the trust level or at the individual level, ensuring that the existence of the trust never increases total income tax liability and in most cases decreases their tax liability. This optionality is valuable.
• Control. Sometimes donors don’t want the beneficiaries to be in total control of the assets that they gift them. Perhaps the beneficiaries are children or immature twenty-somethings. Maybe the beneficiaries are adults but aren’t great with money. Or maybe the donor doesn’t trust the beneficiary’s spouse. Whatever the reason, by putting assets in trust, a donor can put guardrails on how the gifted assets are used.

Popular Types Of Estate Tax Planning Trusts

Valur generates and administers a wide variety of estate tax planning trusts, including:

• Intentionally Defective Grantor Trusts (IDGTs): This is a type of trust that is optimized for minimizing estate taxes. The donor can borrow from these trusts, lend to them, and swap assets with them without income tax consequences. This is a popular strategy for individuals who are either significantly over the lifetime exemption amount or expect to be somewhat over the lifetime exemption amount and live in a low-tax state.
• Non-Grantor Trusts: This is a type of trust that is treated as a separate taxpayer for income tax purposes. In addition to being able to move assets out of the donor’s estate, it can save on state income tax and is commonly used for individuals looking to stack QSBS exemptions or who are close to the lifetime exemption amount and in a high-tax state.
• Grantor Retained Annuity Trusts (GRATs): The donor contributes assets and receives an annuity in return. The annuity is typically only paid for two years. After the final annuity payment is paid to the donor, any remaining principal passes to the donor’s remainder beneficiaries, free of gift tax. This is an effective way of transferring assets to a donor’s family members, provided that the assets generate greater than around 5% annual returns. This strategy is commonly used in conjunction with the other strategies.
• Irrevocable Life Insurance Trusts (ILITs): A type of trust designed to hold life insurance. When the insured (usually the donor) dies, the cash proceeds pass to the donor’s heirs free of estate tax. ILITs are attractive to anyone who expects to be over the lifetime exemption amount. In fact, their combined income and estate tax benefits make them, on paper, more powerful than any other type of irrevocable trust. 
• Spousal Lifetime Access Trust (SLATs): An irrevocable trust for the benefit of the donor’s spouse and heirs. SLATs are used to shift assets out of the donor’s estate while retaining indirect access to the assets as the grantor’s spouse can receive distributions from the SLAT. This is commonly used when individuals want the benefits of an IDGT but want their spouse to be able to receive distributions from the trust.
• Charitable Lead Annuity Trusts (CLATs): This is a type of “split-interest trust” — that is, a trust for the benefit of both an individual and a charity. The charity receives an annuity for a set number of years. At the end of the term, if any principal remains, that principal passes to the donor’s heirs. This is commonly used when families are over the lifetime exemption and want to give to support both their heirs and charity.

Estate Tax Planning Using Annual Exclusion Gifts

Each year, an individual is allowed to gift up to a certain amount per donee without using his or her lifetime gift-tax exemption. There is no limit to the number of different gift recipients. In 2025, the dollar amount is $19,000 (because it’s adjusted for inflation, the dollar amount increases over time). So if you have three children and two parents, you can gift $19,000 to each of them each year, for a total of $114,000 per year. Your spouse has his or her own annual exclusions, so he or she can also gift $19,000 to each donee each year. If you make consistent annual exclusion gifts, over the course of a few decades you’ll be able to shift a large amount of wealth out of your estate, free of gift tax.

But what if you’d rather make annual exclusion gifts to a trust instead of outright gifts to individuals? You can do that, too, provided that the trust includes a special “Crummey” withdrawal provision. In order to claim the annual exclusion for a gift to a Crummey trust, the trustee has to send a letter to each adult beneficiary (or each minor beneficiary’s guardian) notifying him or her of the gifts (which Valur automates and takes care of for you).

Next Steps

As your goals and financial situation change, so do your tax-planning needs. Our goal at Valur is to democratize knowledge about these solutions and to make the planning process seamless, so that everyone can take advantage of the best wealth-building solutions for them.

About Valur

We’ve built a platform that makes advanced tax planning – once reserved for ultra-high-net-worth individuals – accessible to everyone. With Valur, you can reduce your taxes by six figures or more, at less than half the cost of traditional providers.

From selecting the right strategy to handling setup, administration, and ongoing optimization, we take care of the hard work so you don’t have to. The results speak for themselves: our customers have generated over $3 billion in additional wealth through our platform.

Want to see what Valur can do for you or your clients? Explore our Learning Center, use our online calculators to estimate your potential savings or schedule a time to chat with us today!