Estate tax planning remains a critical consideration for high-net-worth individuals seeking to minimize tax burdens while maximizing wealth transfer to beneficiaries.
Three particularly effective strategies include direct gifting, Intentionally Defective Grantor Trusts (IDGTs), and Charitable Remainder Trusts (CRTs). Direct gifting leverages annual exclusion amounts to systematically reduce taxable estates while providing immediate benefit to recipients. IDGTs offer the unique advantage of creating completed gifts for estate tax purposes while remaining tax-neutral for income tax purposes, allowing for powerful wealth transfer opportunities. CRTs provide a balance between charitable giving and family wealth preservation, generating income tax deductions, potential income streams, and charitable impact. When strategically implemented and coordinated with other estate planning tools, these approaches can significantly reduce estate tax exposure while achieving personal wealth transfer objectives.
5 Estate Tax Planning Strategies
1. Direct gifting
Direct gifting is an effective way to reduce potential estate tax liability while transferring wealth to beneficiaries during life. Gifting assets to family members removes those assets from the estate and therefore reduces the potential for an estate tax. In 2025, the lifetime federal exemption amount is $13.99M. This means each person can give away assets valued up to this amount during life or at death without incurring a federal estate tax.
Business ownership interests may be gifted like any other asset, such as cash, real estate, or personal property. For example, business interests can be gifted to children at a discount which helps to minimize estate tax consequences. Business interests worth $10M can be discounted, usually around 30%, and therefore gifted to children at a value of $7M. This uses only $7M of the federal exemption leaving another $6.99M of exemption to be used at death. If the parents gifted cash of $10M, there is no discount. Therefore, the parents used $10M of the exemption leaving only $3.99M to be used at death.
2. Gift to an Intentionally Defective Grantor Trust (IDGT)
An IDGT is an irrevocable estate planning vehicle that removes assets from the gross estate in two ways. First, the grantor (the person creating the trust – usually the business owner) gifts business interests to the trust. Second, the grantor/owner continues to pay the income tax generated by the trust assets. To implement this strategy, the grantor irrevocably transfers assets to the trust. The grantor pays the income taxes on the trust, but the assets in the trust are excluded from the grantor’s estate. This allows the assets in the trust to grow, free from income tax, while further reducing the grantor’s taxable estate each time an income tax payment is made. Assets and any future appreciation of assets in the IDGT will not be subject to the estate tax at the grantor’s death.
3. Sale to an Intentionally Defective Grantor Trust
When a business may significantly increase in value and owners want to transfer the future appreciation to beneficiaries, the owner can sell business interests to an IDGT. The grantor/owner sells business interests to the trust using a promissory note. The trust makes interest payments to the grantor and at the end of the note, the principal is repaid to the grantor. If the business appreciates at a higher rate than the interest rate, the additional value is owned by the trust, thus preventing an increase in the grantor’s estate due to the appreciation.
4. Grantor Retained Annuity Trust (GRAT)
A GRAT is typically created so that grantors can move appreciating assets to heirs while using little, if any, of their federal estate tax exemption. With a GRAT, the grantor/owner makes an irrevocable transfer of business interests to the trust and retains the right to receive annuity payments from the trust for a set term. At the end of the term, the remaining assets, including any appreciation, pass to beneficiaries (typically children) with minimal or no gift tax liability.
5. Charitable Remainder Trust (CRT)
A CRT is a great option for philanthropic business owners. It is an irrevocable trust that allows the grantor/owner to donate assets to charity while receiving annual income for life or for a specific period of time. To implement this strategy effectively, the grantor/owner contributes highly appreciated assets to the trust and receives an income tax deduction. The trust then sells the assets. Because the CRT has a charitable component, the sale is tax-exempt. As beneficiaries of the CRT, the grantor/owner, spouse, and/or children receive an income stream from the trust. When the beneficiaries die, the assets in the trust go to charity. The assets contributed to the trust are excluded from the grantor/owner’s gross estate, thus mitigating any estate tax liability on those assets.
If you have questions about which estate tax planning strategy may work best for your situation, contact our experienced team.
Julie Westbrock, JD, Vice President of Development
