How To Get The Most Out Of Your Estate Tax Exemption

Your estate will have to pay federal estate taxes if its net value when you die is more than the exempt amount set by Congress. Beginning January 1, 2026, the exemption will be reset at $15 million per individual. Every dollar over the exempt amount is taxed (the top tax rate remains 40%).

In addition to federal taxes, state estate/inheritance taxes vary. The majority of states have no estate tax. Other states, like Connecticut, share the same threshold as the federal exemption. Minnesota, and 11 other states plus the District of Columbia tax at a lower threshold than the federal exemption. For example, in 2025, Minnesota’s state tax exemption was $3 million per individual. As a result, a Minnesota estate could be small enough to be exempt from federal tax while still being large enough to pay a state death tax.

Of course, keep in mind, that state and federal governments can change the rules, reduce or increase exemptions, or eliminate certain strategies altogether.

Worried about estate taxes taking a large portion of your legacy before it gets to your children and other heirs? Let one of our experienced lawyers help. Call Sjoberg & Tebelius, P.A., at 651-315-8856 to schedule a meeting.

To determine the current net value of your estate, add your assets then subtract your debts. Be sure to include your home, business interests, bank accounts, investments, personal property, IRAs, and retirement plans. You must also include death benefits from any life insurance policies for which you have any “incidents of ownership.” These include policies you can borrow against, assign or cancel, or for which you can revoke an assignment, or can name or change the beneficiary.

If your net estate is less than the exclusion, no federal estate tax is due. But if it’s more, every dollar over the exempt amount will be taxed.

Planning strategies to maximize your tax-free transfer include:

1. Portability / credit-shelter trusts. The unused portion of a deceased spouse’s unused exemption can be transferred (“ported”) to the surviving spouse by timely election on estate tax returns.
2. Flexible drafting. Use formulas (e.g. “the maximum amount exempt from estate tax”) rather than fixed dollar amounts in trusts and wills.
3. Adjusting allocations in trust pairs. If you and your spouse have separate trusts, consider rebalancing assets to ensure both trusts use available exemptions efficiently.
4. Gifting during life. You can make annual exclusion gifts (up to $19,000 per recipient in 2025) without using your lifetime exemption. Gifts beyond that reduce your lifetime exemption and require filing IRS Form 709.
5. Discount transfers, GRATs, sales to grantor trusts, charitable planning, etc. For larger estates, more advanced techniques may help shift assets while preserving exemption. But rules are complex and subject to change.

Finally, keep in mind that your estate plan is a snapshot of you, your assets, your family, your goals, and the tax laws in effect at the time your plan was prepared. Any time one of these changes, you need to review your plan. This year is a perfect time to have your plan reviewed.