Estate tax planning is crucial if you want your beneficiaries to inherit as much of your wealth as possible. Without a solid tax plan, part of your estate might be lost to liabilities that could have been prevented.
The SECURE Act generally requires most non-spouse beneficiaries to fully withdraw inherited retirement account assets within 10 years of the original owner’s death, eliminating the “stretch IRA” that allowed lifetime payouts.
One of the largest tax hits for an estate can be retirement accounts such as traditional IRAs and 401(k)s. Beneficiaries must pay standard income taxes on those withdrawals based on their income tax brackets.
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State inheritance and estate taxes can vary depending on where the deceased lived or owned real estate. State laws may apply an estate tax, which is levied on the overall estate, or an inheritance tax, which impacts the beneficiary receiving the assets.
Some states have much lower exemption thresholds than the federal government, resulting in unexpected tax bills for moderate estates.
Capital gains tax is another area of estate planning that requires careful consideration. This tax can be triggered if the asset appreciates after the date of the decedent’s death and before it is sold.
Surviving spouses may also face the “widow’s tax” or “widow’s penalty” — a higher federal income tax burden, usually starting the year after their partner dies, when they switch from “married filing jointly” to “single” filer status.
Even though total income is often reduced (due to the loss of one Social Security benefit, usually the lower one), the tax rate applied to the remaining income is higher, and the standard deduction is 50% lower than it is for married filing jointly status.
Required minimum distributions (RMDs) from retirement accounts can also add to taxable income, potentially pushing a surviving spouse into a higher tax bracket.
Advantages of thorough estate tax planning include:
- Liquidity management. Planning ensures the estate has enough cash to pay taxes without forced sales of property or family businesses.
- Controlling asset distribution. Proper documentation ensures assets are distributed according to your wishes rather than state intestacy laws.
- Avoiding probate. Tools such as trusts and beneficiary designations bypass the lengthy, public and costly court-supervised probate process.
- Protecting beneficiaries. Trusts can protect inherited assets from creditors, lawsuits or mismanagement by heirs.
Here are some key components of estate tax planning:
1. Trusts
Specialized trusts can shift taxable assets out of your estate, provide ongoing management or cover estate tax costs. Examples include irrevocable life insurance trusts (ILITs) and spousal lifetime access trusts (SLATs).
An ILIT removes assets from your taxable estate, effectively freezing their value for estate tax purposes. A SLAT allows one spouse to make gifts to an irrevocable trust for the other spouse, removing assets from both estates while retaining access to the funds.
2. Lifetime gifting strategies
Using the annual gift tax exclusion (which allows transferring a set amount to as many people as you want, tax-free), you can reduce the overall size of your taxable estate.
For the 2026 tax year, the limit is $19,000 per recipient. Married couples can split gifts and give up to $38,000 per recipient.
3. Charitable giving
Directing assets to qualified charities through charitable remainder trusts (CRTs), donor-advised funds (DAFs) and qualified charitable contributions (QCDs) can reduce the taxable estate while providing income or tax deductions.
With a CRT, you can donate stock or real estate to charity while generating an income stream for yourself or your beneficiaries for life or a set term. Along with providing a partial tax deduction, it defers capital gains taxes and passes the remaining assets to charity.
A DAF is a specialized giving account allowing a person to make a charitable contribution, receive an immediate tax deduction and recommend grants from the fund to eligible charities.
A QCD allows people 70½ or older to transfer up to $111,000 ($222,000 for a married couple) annually from a traditional IRA to a qualified charity, tax-free. The amount counts toward RMDs but is excluded from taxable income.
QCDs can be made from traditional IRAs and inherited IRAs. The donation must be made directly from the IRA custodian to the charity; the donation cannot go to a private foundation or donor-advised fund.
4. Roth IRA conversions
Converting traditional IRAs and 401(k)s to Roth IRAs leaves your beneficiaries a tax-free inheritance of your retirement accounts. This is especially important given that non-spouse beneficiaries are generally required to empty inherited retirement accounts within 10 years.
Roth IRAs are not subject to RMDs. And by paying the income tax on the converted amount during your lifetime, the size of your taxable estate is reduced.
5. Business succession planning
This strategy minimizes the taxable value of your business. For valuation discounts, you transfer partial shares to family members. Establishing a family limited partnership (FLP) or transferring growing assets to trusts removes future business appreciation from your estate.
6. Step-up in basis
Step-up in basis is a tax provision that adjusts the cost basis of an inherited asset to its fair market value on the date of the previous owner’s death. All unrealized capital gains accrued during the original owner’s lifetime are erased, reducing or eliminating the capital gains tax a beneficiary owes when they sell.
Due to the step-up rule, it’s often more tax-efficient to leave appreciated assets to beneficiaries by a will or trust instead of gifting them while you’re alive.
Clarity and financial stability for loved ones
Estate tax planning is ultimately about more than reducing taxes — it is about creating clarity, protecting the people you care about and preserving the values you want your wealth to support.
Without a thoughtful strategy, families can face unnecessary tax burdens and financial complications during an already emotional time.
By proactively addressing retirement accounts, estate taxes, capital gains exposure and income tax considerations for surviving spouses, you can help ensure that more of your assets pass efficiently to your loved ones.
Dan Dunkin contributed to this article.
This appearance in Kiplinger was obtained through a paid public relations program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
