A guide to estate tax planning for financial advisors

Beyond helping clients reduce capital gains taxes or income taxes, advisors are uniquely positioned to help clients preserve more of their wealth through proper estate tax planning.

Imagine that just a few months after the unfortunate death of one of your clients, their surviving spouse or children find out they have to pay a large unexpected estate tax bill. What if this tax bill could’ve been avoided? 

Taking advantage of estate tax planning tools like gifting, trusts, and the marital deduction can help clients achieve their unique goals, maximize tax savings, and reduce survivors’ financial stress.

Here, you’ll learn how estate and gift taxes work and the ways these taxes can be reduced or potentially avoided altogether to help your clients pass more money to their loved ones instead of Uncle Sam. Let’s start by defining the most important terms related to estate tax planning.

Important estate tax planning terms to know

What is the federal estate tax?

The federal estate tax, or simply the “estate tax,” is a tax imposed on the transfer of a deceased person’s estate to their heirs or beneficiaries. The tax is based on the total value of the estate at death and currently ranges between 18 – 40%. 

The estate tax unified credit, also referred to as the “estate tax credit” or the “unified credit,” serves to offset or reduce an individual’s estate tax and gift tax liabilities. The unified credit is expressed as equivalent to the federal estate tax exemption and covers both gifts made during an individual’s lifetime and transfers made after death. This exemption is currently $13.61 million per individual in 2024. If the value of someone’s estate is below this exemption, their estate is not subject to estate tax.

Additionally, there are two types of asset transfers that can be made without being subject to any estate or gift tax. This includes the marital deduction where a spouse can leave an unlimited amount to their surviving spouse (as long as they’re a U.S. citizen), as well as gifts to charity. We’ll touch more on each later in this article.

How will the estate tax exemption sunset affect your clients’ estate taxes?

In 2024, the estate tax unified credit amount is $13.61 million per individual or $27.22 million per married couple. However, this exemption and credit amount only applies until the end of 2025 when the law that increased the estate tax exemption (The Tax Cuts and Jobs Act) is scheduled to sunset. This will bring the exemption amount down to $6-8 million per person in 2026 (adjusted for inflation).

Because of this estate tax exemption sunset, it’s even more crucial for clients to start planning now so they can take action to minimize estate taxes in time. Download our guide to the 2026 estate tax exemption sunset to learn everything you need to know about the implications of the exemption sunset and tips to help clients prepare.

What is the generation-skipping transfer tax?

When advising clients on estate planning, it’s important for advisors to be aware of the generation-skipping transfer (GST) tax. The GST tax is imposed on various types of transfers made to “skip persons.” “Skip persons” are individuals who are at least two generations below the transferor and persons who are 37 ½ years younger than the transferor. 

The GST tax is separate and in addition to any federal gift and estate taxes that may be owed and has its own exemptions. The GST tax rate is equal to the highest federal estate tax rate, so it’s a tax clients typically want to minimize or avoid whenever possible. Click here to learn more about GST tax and ways to minimize it.

Is there a difference between gift tax vs estate tax?

It’s not uncommon for clients and advisors to be unsure about the difference between gift tax vs estate tax. While the estate tax is imposed on the total value of a person’s estate upon their death, the gift tax focuses on the transfer of assets from one person to another during the giver’s lifetime. 

The gift tax and the estate tax come together under the same Unified Rate Schedule for determining tax rates. Both are also subject to the exemption and credit amounts mentioned above ($13.61 million per individual and $27.22 million per couple in 2024).

Anything your client gives away above the gift tax exclusion amount is considered a taxable gift. Your client can transfer up to the gift and estate tax exemption free of gift tax. Therefore, individuals do not owe any gift tax until they have exhausted the full lifetime gift and estate tax exemption.

How the gift tax works in conjunction with the estate tax

When a client gives away assets during their lifetime, the gift is not subject to gift taxes unless the amount gifted is above the gift tax annual exclusion, which is typically inflation-adjusted every year. 

The gift tax annual exclusion in 2024 is $18,000. This amount can be given to any number of individuals and certain types of trusts each year tax-free and without using any of your client’s gift and estate tax exemption. 

There are a couple of noteworthy exceptions that apply to the annual gifting exclusion. First, if your clients choose to support a loved one’s educational or medical needs by paying tuition directly to the institution or expenses directly to the provider, these gifts are excluded from gift tax regardless of the amount. Second, if clients want to fund a 529 college plan for themselves or loved ones, they can contribute five years’ worth of the annual exclusion in a single year without incurring any tax.

How are inheritance taxes different from estate taxes?

If a client ever asks whether they will be subject to inheritance tax on a gift transferred during their lifetime or at death, the answer will depend on their state of residency. While there is no federal inheritance tax, six states – Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania –  impose their own state-level inheritance tax.

So what exactly is the inheritance tax? Inheritance tax is imposed as a percentage of the value of a decedent’s estate transferred to beneficiaries by will, heirs by intestacy, and transferees by operation of law. The tax rate varies by state and is dependent on the relationship of the heir to the decedent. 

Unlike the estate tax, inheritance tax is a tax paid by the person who inherits money or property of a person who has died.  While there’s much less ability to plan around inheritance tax, having an understanding of your client’s situation from this perspective can help when determining which of the following estate tax planning strategies might work best for them.

Top 3 estate tax planning strategies

Some of the measures that clients can take to minimize estate taxes include reducing the size of their taxable estate through gifting, utilizing trusts, and leveraging the marital deduction for married clients. Let’s look at a high-level overview of each strategy below:

1. Annual gifting and giving

Gifting may be one of the simplest estate planning strategies clients can use to reduce estate taxes while supporting the people or causes they care about most.

The gift tax lifetime limit allows individuals to give away up to the estate and gift tax exemption amount ($13.61 million per individual in 2024) over their lifetime. Because of the upcoming estate tax exemption sunset, it’s important for advisors to let clients know about the annual gift tax exclusion even if they don’t currently have a taxable estate. Using the annual gift tax exclusion ($18,000 per each done in 2024) allows clients to gift assets to loved ones without using their estate and gift tax exemption.

If your clients make gifts over the annual gift exclusion amount in a given year, they may need to file a gift tax return, even if no gift tax is due. Your clients can offset the value gifted over the annual gift tax exclusion amount with their lifetime gift and estate tax exemption. If their total gifts are under this amount, no gift tax will need to be paid.

For clients who enjoy contributing to charitable organizations, donating to non-profits directly or establishing charitable trusts can be a great solution. This allows them to reduce their taxable estate and potentially their taxable income as well. Learn more about how to use gifting strategies for estate planning here.

2. Trusts structured to reduce or eliminate estate taxes

Certain trusts are structured specifically with the aim of reducing estate tax liability. What follows are a few trusts that are used most commonly in estate planning. 

Irrevocable Life Insurance Trust (ILIT)

As the name reveals, an ILIT is an irrevocable trust that is funded with a life insurance policy. Because the trust owns the policy (rather than the individual), the life insurance proceeds are generally removed from that individual’s estate. An ILIT is a great tool to provide liquidity for heirs in cases where they’d have large expenses (taxes or other) upon the clients’ death.

Generation-skipping trust (GST trust)

If your clients want to pass assets to grandchildren or great-grandchildren, they can utilize a generation-skipping trust to minimize estate and GST taxes that would be incurred if their children inherited the assets first and then passed them onto younger generations.

Qualified personal residence trust (QPRT)

A QPRT allows individuals to remove their primary residence or vacation home from their estate while still being able to benefit from its use during a set period of time. After that period, the property is transferred to the beneficiaries, often at a reduced value for gift tax purposes.

Grantor Retained Annuity Trust (GRAT)

A grantor-retained annuity trust (GRAT) allows clients to transfer assets into an irrevocable trust while receiving annuity payments. If the assets in the trust appreciate beyond the received annuity payments, the remainder passes to beneficiaries with minimal to no gift tax liability.

To help your clients picture the tax implications of utilizing one or more of these trust strategies, consider using an estate tax planning software for financial advisors such as Vanilla.

Click here to download our guide to trusts for estate planning to learn more about different types of trust and how clients can use them to effectively preserve and protect their wealth.

3. Estate tax planning for married clients

With the marital deduction, married individuals can avoid estate or gift tax on any amount transferred to their U.S. citizen spouse. With proper estate planning, however, you could use the below strategies to also help the next generation save significant amounts in taxes even after the second spouse dies.

Portability

Portability allows a surviving spouse to take on the unused portion of the deceased spouse’s estate tax exemption amount. For married clients, this one strategy can make a world of difference in helping heirs avoid unnecessary estate taxes.

Let’s look at an example with the 2024 estate tax exemption of $13.61 million per individual: If spouse A died today with $5 million in assets, there’s an unused $8.61 million estate tax exemption to their name. By making the portability election and transferring this unused exemption to the surviving spouse, surviving spouse B has now increased the size of their available total exemptions ($13.61 million of their own exemption plus the $8.61 million from their deceased spouse). This means they can pass that much more (a total of $22.22 million) to their heirs free of gift and estate tax.

Taking advantage of portability requires the surviving spouse to make the portability election by filing an estate tax return within nine months of the deceased spouse’s death.

A/B Trust

A combination of the marital trust and the bypass trust, the A/B trust arrangement allows clients to reduce estate taxes through a trust that splits into two upon the death of the first spouse. 

The A trust transfers assets to an irrevocable trust for the benefit of the surviving spouse, taking advantage of the marital deduction. The B trust is an irrevocable trust that bypasses the surviving spouse’s estate because it is typically funded up to the first spouse to die’s remaining exemption amount. The trust generally provides income to the surviving spouse during their remaining lifetime and goes to the beneficiaries upon the surviving spouse’s death.

While portability in some ways eliminates the need for A/B trust planning for many couples, these trusts can still be useful in certain cases. The B trust gets not only the value of the assets transferred into it outside of the surviving spouse’s estate, but any appreciation on those assets is outside of the surviving spouse’s estate as well. This can be a great benefit for couples whose total taxable estate exceeds their combined estate tax exemption amounts.

Qualified terminable interest trust (QTIP)

You could suggest a qualified terminable interest trust (QTIP) to clients who want to maintain control over how the trust assets are distributed after the death of their spouse. With a QTIP, the surviving spouse receives income from the trust during their lifetime. After the second spouse’s death, the remaining assets are distributed to beneficiaries as designated in the trust by the first spouse.

Other ways to save taxes during estate planning

Gifting, trusts, and the marital deduction are all great tools that clients can use to reduce the tax bill for their survivors and heirs. Additionally, you can help clients better preserve their wealth by being strategic about saving on capital gains or income taxes.

For example, if your clients are in a lower tax bracket than their heirs, consider suggesting that they take more than their Required Minimum Distribution (RMD) from retirement accounts. That way, they’ll pay income taxes at their lower bracket, potentially saving their higher-bracket children from higher income taxes when they take money from the accounts.

Another important estate planning tool that comes up when you help clients optimize their portfolios is step-up in basis. Since the cost basis of assets is stepped-up at death, it may be wise to hold off on selling highly appreciated assets until after a client’s death. That way they can avoid unnecessary capital gains taxes.

If your clients haven’t started on their estate planning, use our estate planning checklist for financial advisors to help them reduce overwhelm and plan for the most tax-efficient way to leave their legacy.

If you’re looking for an estate tax planning software for financial advisors to help clients map out the projected tax liability of their estate, try Vanilla! Schedule a demo to see how Vanilla can help you uncover opportunities to help clients minimize estate taxes in a way that’s clear, simple, and efficient.