How to Reduce Estate Tax

Money or property you leave to others might be subject to estate or inheritance taxes, sometimes called “death taxes,” but this isn’t likely. Most estates aren’t large enough to be taxed, and only a handful of states have their own estate or inheritance taxes. Because the federal estate tax exemption is high and there are many tax planning options, even people with significant wealth can often reduce or avoid these taxes.

Understanding Estate Taxes

Who pays estate tax? Only people with significant wealth are required to pay federal estate taxes. In 2026, your estate will only owe federal estate tax if its total value is more than $15 million ($30 million for married couples). This amount is adjusted for inflation annually.

However, some states also have their own estate or inheritance taxes, which could apply even if your estate is not large enough to owe federal estate tax. Around a dozen states, listed below, continue to impose a state estate tax. The exemption amount that triggers these taxes varies by state and is typically lower than the federal amount. Oregon has the lowest exemption at $1 million, while Connecticut has the highest, at over $15 million.

Some states also have a state inheritance tax, which is imposed on inheritors rather than the estate. (This distinction means that, technically, there is no federal inheritance tax, only the federal estate tax.) The rules vary, but whether your beneficiaries owe this tax usually depends on how they are related to you and how much your estate is worth. Close family members often pay less or are exempt, while distant relatives or friends may pay more. Indiana and Iowa recently eliminated their inheritance taxes.

Federal Estate Tax

The federal estate tax affects only the wealthiest families in the U.S. For deaths in 2026, only estates worth more than $15 million will owe this tax. Married couples can combine their exemptions, allowing them to leave up to $30 million tax-free. If the first spouse doesn’t use all of their exemption, the surviving spouse can use what’s left.

How much is estate tax if you owe it? Right now, the federal estate tax rate is 40% on the part of your estate that is above the exemption amount. This rate is applied after any deductions and credits are subtracted.

State Estate and Inheritance Taxes

States may impose two types of taxes after someone dies: estate taxes or inheritance taxes. Maryland is the only state that has both, but it also offers generous exemptions. Here’s the difference between estate and inheritance tax:

Estate tax. The states listed below have their own estate taxes on top of the federal estate tax. Each state sets its own exemption amount, which is the part of the estate that isn’t taxed. For deaths in 2026, these amounts range from $1 million to over $15 million, and most states adjust them for inflation. Because state exemptions are usually lower than the federal exemption, your estate might owe state estate tax even if it doesn’t owe federal estate tax, depending on where you live and how much your estate is worth.

Inheritance tax. Several states, listed below, have a separate inheritance tax on property left to beneficiaries. The amount of tax depends on how the beneficiary is related to the person who died. Spouses and close family members are often exempt or pay a low rate, while distant relatives or unrelated heirs may pay more.

How to Reduce Federal Estate Tax

If you have a large estate and want to avoid estate tax on what you leave behind, talk to a tax advisor or estate planning attorney about these tax-saving strategies. You can use these methods on their own or together for better results.

Tax-Exempt Gifts

If you have more money or property than you need, giving away large gifts while you’re alive can reduce federal estate taxes. These types of gifts are not taxable:

• gifts up to the annual exclusion limit—$19,000 in 2026—to any number of people (married couples can give up to $38,000 per recipient each year)
• tuition payments made directly to an educational institution (note: payments for books, supplies, or living expenses do not qualify)
• medical expenses paid directly to the provider
• gifts to your spouse, if they are a U.S. citizen
• gifts made directly to a political organization for its use, and
• donations to qualifying charitable organizations.

AB Living Trusts

An AB living trust, also called an AB disclaimer trust, can help couples with very large estates reduce or avoid estate tax. After the first spouse dies, the couple’s assets are split into two trusts: Trust A for the surviving spouse and Trust B for the heirs of the spouse who died. This setup lets both spouses use their own estate tax exemptions, provides for the surviving spouse, and eventually passes assets to beneficiaries. With current federal estate tax rules, most married couples won’t need an AB trust unless their combined estate is over $30 million.

Still, you might consider an AB trust in some situations:

• You have a large estate. If you are concerned that future changes in estate tax laws could create tax liability, an AB trust can provide flexibility to adapt to changing laws.
• You aren't legally married. Unmarried couples do not benefit from the special estate tax rules for married couples, so an AB trust could be helpful if your combined estate exceeds $15 million.
• You’re concerned about state estate tax. If you live in a state where the estate tax exemption is lower than the federal exemption, your estate could owe state estate tax even if it is exempt from federal tax. An AB trust can help reduce or avoid these state taxes.

Keep in mind that AB trusts can limit the surviving spouse’s control over the trust property, may be expensive to set up, and can sometimes lead to family disagreements. If you think an AB trust might help you, do more research or talk to an experienced estate planning attorney about your options.

Charitable Trusts

If you want to support a charity you care about, lower your income taxes, and get a steady income for life, a charitable trust could be a good choice. Charitable trusts aren’t just for the wealthy. Some need only a few thousand dollars to start, and others have no minimum amount.

QTIPs and QDOTs

These trusts, commonly referred to by their acronyms, are primarily used by married couples to handle possible estate tax issues. A QTIP (Qualified Terminable Interest Property) trust lets couples delay estate tax until after the second spouse dies and allows both spouses to decide who will inherit the property. A QDOT (Qualified Domestic Trust) is useful if a spouse who is not a U.S. citizen will inherit a large amount of property.

Life Insurance Trusts

Life insurance money does not go through probate, but it is still part of your estate for estate tax purposes. To reduce possible estate taxes, you can transfer the policy to a life insurance trust or give it directly to the beneficiary at least three years before you die. Like other estate tax strategies, review this plan regularly in case tax laws change.

Learn More About Planning Your Estate

With good estate tax planning, most people can avoid or greatly reduce estate and inheritance taxes at both the federal and state levels. Knowing your options and talking to a qualified professional can help make sure more of your assets go to the people and causes you care about.

The articles below can help you learn more about estate planning:

• Property Management for Minors in Estate Planning
• How to Avoid Probate
• What Happens If You Die Without a Will?

You can find out more about making WillMaker’s will and living trust in WillMaker’s Legal Manual.