Demystifying Inheritance Tax Planning in 2025

At the heart of any wealth transfer or inheritance plan is a simple goal: minimize your estate’s tax exposure. Doing this can mitigate the financial burden on your beneficiaries and seamlessly transition assets from one generation to the next.

No two estates are the same, so there is no one-size-fits-all approach to inheritance tax planning. Timing also presents considerations — tax laws can shift from one year to the next, so any broader inheritance tax planning strategy needs to be reviewed regularly and updated. Understanding that these changes are cyclical can help you further refine your strategy.

Key Takeaways

• How you plan for inheritance taxes depends on your specific circumstances.
• The ultimate goal of any inheritance tax strategy is to minimize your estate beneficiaries’ exposure to taxes by gifting assets during your lifetime.
• There’s a possibility that the federal gift tax exemption is much lower in 2026, so it’s helpful to start thinking — or rethinking — your plan with that in mind.

An Overview of Inheritance Taxes

Beneficiaries are generally responsible for paying inheritance taxes, making them different from estate taxes, which are paid by the deceased person’s estate before the remaining assets are distributed to the beneficiaries. Rates of inheritance tax vary depending on the beneficiary’s relationship to the deceased — whether they’re a spouse, child or other relative — and their location, since only five U.S. states have inheritance taxes. This excludes Iowa, whose inheritance tax was repealed for deaths occurring after January 1, 2025. There is no federal inheritance tax.

A comprehensive inheritance tax plan takes into consideration gifting during one’s lifetime and the federal estate tax. Federal and state tax laws limit how much you can give to others without incurring gift, inheritance or estate taxes, but taxpayers can use powerful wealth transfer tools such as the federal lifetime gift tax exemption and the annual exclusion to strategically distribute wealth during their lifetime, thereby reducing their beneficiaries’ exposure to inheritance tax.

Why Planning for Inheritance Taxes Is a Crucial Part of Your Wealth Transfer Strategy

Your goal with any wealth transfer plan should be to proactively protect your hard-earned assets and limit the financial burden on your beneficiaries wherever and however you can. The importance of this goal may seem self-evident, but understanding what motivates you to plan a seamless transition of your assets will help you identify your priorities and eventually come up with a plan that more faithfully reflects what you care about most.

Control the Distribution of Your Assets

You worked hard to acquire and manage your assets, so naturally you want to determine what happens to them when you’re gone. Trusts are versatile tools that allow you to set rules about how and when assets are distributed.

Preserve Your Legacy

It’s important to leave the people who will manage and grow your legacy in a strong position. By building a wealth transfer plan that accounts for nuances in tax law, you can minimize the uncertainty that comes with change and prevent your beneficiaries from selling off valuable assets or pieces of your business to satisfy unexpected tax obligations.

Sustain Your Charitable Giving

Beyond its utility for reducing your taxable estate, you may want to make sure your beneficiaries can sustain your charitable giving strategy. Since donations are often exempt from inheritance taxes, charitable giving is an avenue not just for continuing your legacy but involving your beneficiaries in it as well.

Reduce the Financial Burden on Your Family and Minimize Conflict

Planning for inheritance taxes helps you clarify who will receive which assets. More clarity creates fewer opportunities for misunderstandings and disputes among your beneficiaries. It also provides at least some peace of mind to those you leave behind that any potentially disruptive changes have already been anticipated and managed responsibly.

Federal Gift and Estate Tax Laws in 2025 and Possible Changes to the Lifetime Gift and Estate Tax Exemption

The current rates and exemptions were part of the 2017 Tax Cuts and Jobs Act, often referred to as the Tax Act. Though only modestly heralded at the time, the Tax Act introduced significant tax reductions for individuals, estates and corporations, benefiting approximately 80% of U.S. taxpayers.

The federal lifetime gift and estate tax and the generation skipping taxes (GST) exemptions were both $13.61 million per person in 2024. In 2025 the amount is $13.99 million per person. Additionally for 2025, the annual exclusion — the specific amount of money you are allowed to give to any individual within a tax year before you need to use your gift tax exemption — is $19,000 for individuals and $38,000 per married couple if they elect gift splitting.

These exemptions and exclusions have helped wealthy families pass along substantial assets tax-free, thereby reducing the ultimate estate inherited by beneficiaries who may be subject to inheritance taxes. However, the lifetime gift and estate and GST exemptions are set to expire January 1, 2026, possibly cutting the exemptions in half and exposing estates above the new limit to a federal tax rate as high as 40% before accounting for any additional inheritance taxes.

It is possible that the exemptions are extended beyond 2026, but nothing is guaranteed. The wisest course of action is also usually the most proactive — starting or revising your plan for estate taxes now removes the uncertainty of what happens beyond 2025.

Common Strategies for Inheritance Tax Planning

Your options for navigating inheritance taxes and taking advantage of current gifting limits will most likely involve some combination of the strategies we outline below, but each person’s plan is unique to their circumstances, goals and lifestyle.

Fundamental Planning

Moving significant wealth to beneficiaries does not always require complex transactions. The key to ensuring the most favorable outcome is finding a balance between achieving your planning goals and complying with applicable tax laws.

When accounting for inheritance taxes in your wealth transfer plan, consider the total value of your assets, including those that do not include beneficiary designation or co-ownership.

Using Current Tax Exemptions and Exclusions to Minimize Future Inheritance Taxes

We discussed the implications of some of these exemptions changing in 2026, but you will want to consider the following as you draft your wealth transfer plan:

• The lifetime gift exemption, which for 2025 is $13.99 million per individual and $27.98 million per couple, if planning includes gift-splitting election or portability.
• The annual exclusion, which for 2025 is $19,000 per individual and $38,000 per married couple, if filing and electing gift splitting. Any amount above these limits counts against your total gift tax exemption, and the annual exclusion is applied each year, meaning any unused portion does not carry over to the next year. Using the annual exclusion can help you gradually transfer wealth without absorbing your federal lifetime gift and estate exemption as quickly.
• Education and health tax exclusions, which include direct payments of qualified education and medical expenses on behalf of someone, related or unrelated, are not considered taxable gifts and do not diminish your gift tax exemption or annual exclusion. In some cases, qualified medical expenses can even include medical insurance policy premiums.
• Marital deduction, which unlike the annual exclusion allows you to transfer an unlimited amount of assets to your spouse, both during your lifetime and at death, without any gift or estate tax consequences. To take advantage of this deduction, you must be legally married, and your spouse must survive you and be a U.S. citizen.

Trusts

Transferring wealth through trusts offers greater flexibility and control than outright gifts. Trusts can protect your wealth while preserving your authority over how your assets are distributed.

The ocean of trusts you can incorporate into your tax plan is wide and deep, so we will only discuss them in general terms here. Your options include:

• Revocable, or living, trusts allow you to modify the terms of the trust throughout your lifetime or even revoke it entirely and regain full control of the trust assets. With a revocable trust, the assets remain part of your estate, and you are subject to income and estate taxes on its assets. Often, revocable trusts are used for ease of management, privacy and avoidance of probate. Note that the beneficiaries of assets in your revocable trust would be subject to inheritance tax, much the same way assets are subject to federal estate tax.
• Irrevocable trusts are less flexible but offer certain tax advantages. Generally, once an irrevocable trust is established, you cannot make changes to it. Transferring assets by a completed gift to a properly crafted irrevocable trust can remove them and any future appreciation from your taxable federal estate, further shielding them from inheritance tax.

GST Tax

As discussed earlier, the GST tax is a federal tax that applies to transfers that skip a living generation in inheritance or gift-giving, such as leaving assets directly to grandchildren.

Valuation Discounts

Valuation discounts (such as fractional interest, minority interest and lack of marketability) are percentages used to lower the value of the interest being transferred and are commonly available for nonvoting stock in a business, private investment partnerships, minority interests in limited liability companies (LLCs) and limited partnership interests. By reducing the taxable value of assets, valuation discounts lower both your gift and estate tax liabilities. Valuation professionals assess the discount’s justification and determine its appropriate percentage. A qualified appraisal is required when filing gift and estate tax returns.

Life Insurance

The primary advantage of life insurance is the income-tax-free death benefit, except in rare cases. Like many other inherited assets, the death benefit received by beneficiaries is generally exempt from income tax. Exceptions to this rule include items known as income in respect of a decedent, typically IRAs, 401(k)s and other retirement accounts. Unlike term life insurance, permanent insurance policies (whole life, variable and universal) include a cash value
component that can grow over time. This cash value can be accessed through loans or withdrawals, which may have tax implications, or used to offset future premiums.

For many families of significant wealth, life insurance is used to cover in whole or in part the estate tax liability or provide immediate funds without requiring the sale of valuable assets at potentially disadvantageous prices. Keep in mind that while the beneficiary generally is not assessed income tax on proceeds from life insurance, those proceeds are included in the taxable federal estate of the owner. The use of an irrevocable life insurance trust can be a valuable tool in planning related to this.

Inheritance Tax Planning Doesn’t Have to Be Complicated

Transferring your assets from one generation to the next starts with a simple premise: You want to preserve and protect your wealth and legacy. Understanding your options for doing that will help demystify the process and clarify exactly what you want your wealth transfer plan to look like.

Frequently Asked Questions

What states are exempt from inheritance taxes?

In addition to the federal estate tax, 12 states and the District of Columbia impose their own estate taxes, and six impose inheritance taxes. Those states are:

• Iowa
• Kentucky
• Maryland
• Nebraska
• New Jersey
• Pennsylvania

Of those six states, only Maryland currently imposes both and estate and inheritance tax. For deaths occurring after January 1, 2025, Iowa no longer imposes an inheritance tax.

What is the IRS limit for inheritance?

There is no federal inheritance tax, so the limit will vary from state to state. There is, however, a federal estate tax exemption of $13.99 million per individual and $38,000 per married couple, if filing and electing gift splitting, in 2025.