The purpose of estate tax planning is to maximize the assets you pass on to future generations by minimizing gift and estate taxes. Estate-tax strategies revolve around the use of irrevocable trusts. This article discusses the most common types of irrevocable trusts that are used to minimize gift and estate […]
The gift and estate tax system is one of the biggest obstacles to building true multigenerational wealth. Right now, the gift and estate tax exemption — which is the amount that you can pass to your heirs free of gift taxes or estate taxes — is at an historically high level: $13.99 million. Then, on January 1, 2026, it’s scheduled to be cut in half to about $7 million. In dollar terms, that would be the largest estate tax increase in American history! It’s possible that Congress will enact legislation in 2025 extending the current exemption level, but with Congress mired in gridlock, that’s not a safe bet. Fortunately, there’s a way to “lock in” the current exemption amount regardless of what Congress does, and Valur can help.
The estate tax is a tax on wealth transfers when someone dies. The estates of U.S. citizens and residents are taxed on all of their worldwide assets — including real estate, retirement accounts, life insurance, brokerage accounts, crypto, intellectual property, and whatever else a person owns. The federal estate tax rate is currently 40% on assets in excess of $13.99 million (that’s the exemption amount described above). A number of states impose their own estate taxes as well, bringing the combined effective federal/state estate tax rates to as high as 52% in some parts of the country.
The gift tax is a tax on wealth transfers made during the transferor’s lifetime. It’s also levied at 40%, and it shares the same $13.99 million exemption amount with the estate tax. So, if you use a portion of your gift tax exemption during your lifetime, your estate tax exemption will be reduced proportionately upon your death.
In addition, there’s a second layer of federal tax, called the generation-skipping transfer tax, that applies to transfers to members of generations after your children’s generation (grandchildren, for example). It is 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 Florida.
To understand why the exemption amount is scheduled to be cut in half on January 1, 2026, you have to understand how the exemption was increased in the first place. Back in 2017, the exemption was $5.49 million. As part of the Tax Cuts and Jobs Act (TCJA), enacted in December 2017, the exemption was doubled. (The exemption was $11.18 million in 2018; since then, it’s been increasing with inflation.) Originally, Republicans had wanted to repeal the estate tax entirely, but they didn’t have the votes to do that, so they settled on doubling the exemption. Because Senate Republicans didn’t have the 60 votes necessary to overcome a filibuster, they made the increased exemption amount sunset on January 1, 2026.
For someone who would otherwise die with more than $13.99 million of assets, the gift and estate tax exemption is worth at least $13.99 million * 0.40, or around $5.6 million. That means that if the exemption is cut in half, as scheduled, taxpayers who haven’t used their exemptions will lose at least around $2.8 million each in tax breaks. But this is probably an understatement of the exemption’s true value because it doesn’t account for other factors, like the fact that appreciation that occurs after you’ve moved assets out of your estate is not subject to estate tax, or the ability to obtain valuation discounts for lifetime gifts. Once you account for these factors, you’ll find that the additional exemption (above the 2026 scheduled level) is worth far more than $2.8 million.
For example, imagine that Julia, a single 60-year-old businesswoman, has a $30 million net worth. If, in 2025, she makes a gift to a trust for her descendants of the full $14 million exemption amount, the assets in the trust generate 5% annual inflation-adjusted returns, and the initial gift is discounted by 35% because the assets she funds the trust with are illiquid and non-controlling, then there will be around $88.66 million (in 2025 dollars) in the trust by the time she dies in 2054. If, given the same assumptions, she had used only $7 million of exemption in 2025 and then the exemption fell to $7 million in 2026, preventing her ever from using the increased exemption amount, there’d be $44.33 million in the trust in 2054. Depending on what state she lives in when she dies, the estate-tax savings for her heirs from using the full $13.99 million exemption amount in 2025 would range from $17.73 million at the low end to $23.05 million at the high end. The savings would be even greater if we accounted for the generation-skipping transfer tax — but that’s beyond the scope of this article.
Fortunately, for high-net-worth people, there’s a simple way to “lock in” the current exemption level before it drops: make gifts now. Gifts made before the end of 2025 are protected from future “clawbacks” — so the IRS won’t claim five years from now that some future exemption level applies to gifts that you made when the exemption was higher.
Typically, people use trusts to make large gifts. Trusts are creditor protected and tax efficient, among other advantages. Valur’s in-depth articles and Guided Planner can help you decide which type of trust is right for you but here are an overview of commonly used vehicles you can use before 2026 to minimize your estate taxes.
You can also compare the quantitative returns and tax savings of these different strategies using our estate tax savings calculator and customize it to your own situation
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From picking the best strategy to taking care of all the setup and ongoing overhead, we make things simple. The results are real: We have helped create more than $3 billion in additional wealth for our customers. If you would like to learn more, please feel free to explore our Learning Center. You can also see your potential tax savings with our online calculators or schedule a time to chat with us!
