Estate tax planning when you're above the exemption

The federal estate tax touches very few households — the exemption is about $13.99 million per person (roughly $28 million per married couple) in 2025 — but above it, the rate is a flat 40% on every additional dollar. Families cross the line more often than they expect: a business, a stock windfall, appreciating real estate, life insurance payouts. The planning toolkit is mature and legal; the common failure is starting a decade too late, because nearly every tool works by moving future GROWTH out of the estate, and growth takes time.

First, the free stuff

• Annual exclusion gifts: $19,000 per recipient per donor (2025), to unlimited recipients, no forms, no exemption used. A couple with 3 married children and 6 grandchildren can move $456,000/year ($38,000 × 12 recipients) — over $4.5 million per decade before growth.
• Direct payments of tuition and medical bills for anyone, in any amount, paid straight to the institution — on top of annual exclusions.
• 529 superfunding: five years of exclusions at once ($95,000 per donor per beneficiary) into accounts that grow outside the estate.
• Portability: an election on the first spouse's estate return (Form 706) preserves their unused exemption for the survivor. Filing it costs a few thousand dollars; forgetting it can cost millions. File it even when 'unnecessary.'
• Marital and charitable bequests: unlimited and untaxed — the estate tax is really a tax on transfers to everyone else.

The structural tools, plainly described

• Irrevocable life insurance trust (ILIT): owns your life insurance so the death benefit — often millions — lands outside the estate. Cheap, standard, almost always step one.
• Grantor trusts (e.g., 'intentionally defective' ones): you gift or sell assets to the trust and keep paying its income taxes personally — every tax payment is an additional, exemption-free transfer to heirs.
• Estate freezes (GRATs, installment sales to trusts): lock today's value in your estate and pass the future appreciation out. Ideal for assets about to grow fast — pre-IPO stock, a scaling business.
• Valuation discounts: minority stakes in family entities holding a business or real estate can be gifted at appraised discounts of 20–35% for lack of control and marketability — moving more value per exemption dollar. Aggressive versions attract IRS attention; appraisals matter.
• SLATs (spousal lifetime access trusts): each spouse gifts to a trust benefiting the other — assets leave the estates while the household keeps indirect access. Popular, useful, and full of traps (divorce, death of the beneficiary spouse, reciprocal-trust doctrine) requiring careful drafting.
• Charity at scale: charitable remainder trusts, lead trusts, and foundations convert 40%-taxed dollars into mission-directed ones.

The tensions to manage

• Estate tax vs. income tax: gifted assets carry your old basis; inherited assets get stepped up. For appreciated assets UNDER the exemption, dying with them often beats gifting them. Above it, 40% usually outweighs the lost step-up — but run the math per asset.
• Irrevocable means irrevocable: money moved out is no longer yours for the long retirement, the second marriage, or the changed mind. Never gift your own security away — solvency first, legacy second.
• The law moves: exemptions have swung with legislation and are periodically scheduled to change. Good plans are built in layers that still make sense if the exemption halves or doubles.
• State estate and inheritance taxes: a dozen-plus states tax estates at thresholds as low as $1–7 million — some families' entire exposure is state-level, and domicile planning is part of the answer.

The first three years, sequenced

1. 1
   Year one: the free moves and the insurance fix

   Start annual exclusion gifts to every intended heir, set up direct tuition and medical payments, superfund 529s where relevant, and move life insurance into an ILIT — noting that existing policies transferred to an ILIT stay in the estate for three years, which is why this is a year-one task.

2. 2
   Year two: freeze the growth assets

   With the estate team assembled, identify the assets most likely to appreciate — the business, pre-IPO stock, development real estate — and move future growth out via GRATs, installment sales to grantor trusts, or discounted gifts of minority interests, with a fresh appraisal behind every number.

3. 3
   Year three: stress-test and institutionalize

   Model the plan against exemption changes in both directions, confirm liquidity to pay any remaining estate tax without a fire sale (insurance, buy-sell agreements, or a credit line), and put the annual rhythm — gifts, trust funding, appraisal updates, portability reminders — on a calendar someone owns.

The sequencing logic is worth stating plainly: the free moves compound longest so they go first, the insurance trust has a statutory three-year lookback so it can't wait, and the freeze techniques work best on assets that haven't appreciated yet — which is why year two beats year five by more than three years of returns. Families who run this sequence in their 50s and 60s routinely move eight figures of future value out of the 40% zone using nothing beyond the standard toolkit applied early.

The bottom line

Above the exemption, every retained dollar of future growth is a 60-cent dollar to your heirs. The playbook, in order: exhaust the free moves (annual gifts, direct tuition/medical, portability, 529s), get insurance into an ILIT, then freeze or gift the high-growth assets through the right trusts with professional help — while managing the basis step-up tradeoff and your own lifetime security. None of it is exotic; all of it rewards the decade-early start. Estate tax is, more than anything, a tax on procrastination.