Estate planning can be a complex process, but it’s crucial for protecting your legacy and minimizing tax burdens. This article explores effective strategies and tools for reducing estate taxes, drawing on insights from seasoned financial experts and estate planning professionals. From implementing the Three Cs Strategy to leveraging trusts and partnerships, readers will discover practical approaches to preserve more of their wealth for future generations.
- Implement The Three Cs Strategy
- Leverage Annual Gift Tax Exclusion
- Utilize Irrevocable Life Insurance Trusts
- Create Family Limited Partnerships
- Transfer Property with Residence Trusts
- Freeze Asset Value with Annuity Trusts
- Combine Charity and Income with Trusts
Implement The Three Cs Strategy
I utilize a strategy I named “The Three C’s” to help my clients avoid paying estate taxes: (1) Compress, (2) Compound, and (3) Contribute.
Compress:
Using a Family Limited Partnership, or more commonly, an LLC, we compress approximately $38 million of assets into the approximately $27 million unified federal gift and estate tax exemption available to a married couple (half this for a single individual). We do this by moving assets into an LLC and gifting away non-voting ownership interests. These ownership interests are discounted to account for the lack of control and the lack of marketability. We gift the assets using a Spousal Lifetime Access Trust (SLAT); this way, your spouse retains the benefit of the wealth during their lifetime.
Compound:
In this step, we aim to keep the compound interest associated with asset growth out of the client’s estate. We do this by having clients sell their LLC ownership interests to their own SLAT in exchange for a promissory note of equal value. The assets are now in the trust, and all appreciation of those assets will avoid the estate tax. Meanwhile, the amount of the promissory note, which remains in the client’s taxable estate, will not grow.
Contribute:
If there is remaining money in the estate, and the client wishes to avoid paying estate taxes, the client can decide to contribute to charity to avoid estate taxes. We generally do this through the establishment of a Testamentary Charitable Lead Annuity Trust. The trust is funded at the death of the client, and a charity receives a fixed annuity payment every year for a term of years, generally 15-20 years. Assuming the growth of the trust outpaces the IRS-determined rate, at the end of the 15-20 years, the remaining money in the trust is distributed to the client’s heirs tax-free as a sort of second inheritance.
Jake Howell
Attorney, Howell Estate Planning
Leverage Annual Gift Tax Exclusion
On a fundamental level, the best way to approach minimizing estate taxes is by shifting assets out of the taxable estate or leveraging exemptions and deductions. One popular yet still underutilized strategy is the Annual Gift Tax Exclusion. In 2025, individuals can give up to $19,000 per recipient without triggering any gift tax or dipping into their lifetime estate exemption. This means you could theoretically give $19,000 to each of your children, every year, and reduce your taxable estate without having to file a gift tax return. Since this is a per-recipient limit, the impact can be multiplied across multiple donees.
Jennifer L. Zegel, Esq.
Estate Planning Attorney and Chief Product Officer, Eternal Me
Utilize Irrevocable Life Insurance Trusts
Irrevocable life insurance trusts are powerful tools in estate planning. These trusts remove life insurance policies from an individual’s taxable estate. By transferring ownership of the policy to the trust, the death benefit is not included in the estate for tax purposes.
This strategy can significantly reduce the overall estate tax burden for beneficiaries. The trust can be structured to provide liquidity to pay estate taxes or other expenses. Consider consulting with an estate planning attorney to explore how an irrevocable life insurance trust might benefit your specific situation.
Create Family Limited Partnerships
Family limited partnerships offer a strategic approach to reducing the taxable value of an estate. This structure allows individuals to transfer assets to a partnership while maintaining control as general partners. Limited partnership interests can then be gifted to family members at a discounted value.
The discounts are justified due to lack of control and marketability of these interests. This method can effectively reduce the overall taxable estate value over time. Explore the potential benefits of a family limited partnership with a qualified financial advisor.
Transfer Property with Residence Trusts
Qualified personal residence trusts provide a unique opportunity to protect home equity from estate taxes. Homeowners can transfer their primary residence or vacation home into this type of trust for a specified term. During this period, they retain the right to live in the property.
At the end of the term, ownership transfers to the beneficiaries at a reduced gift tax value. This strategy can result in significant tax savings for valuable real estate. Investigate whether a qualified personal residence trust aligns with your estate planning goals.
Freeze Asset Value with Annuity Trusts
Grantor retained annuity trusts offer a method to freeze the value of appreciating assets for estate tax purposes. The grantor transfers assets into the trust and receives annuity payments for a fixed term. Any growth in the assets above the IRS-assumed rate of return passes to beneficiaries tax-free.
This technique is particularly effective in low-interest-rate environments. It can be an excellent way to transfer wealth to the next generation while minimizing gift and estate taxes. Discuss the potential of using a grantor retained annuity trust with your estate planning team.
Combine Charity and Income with Trusts
Charitable remainder trusts provide a dual benefit of generating income and reducing estate taxes. These trusts allow individuals to donate assets while retaining an income stream for life or a specified term. The donor receives an immediate income tax deduction for the present value of the future gift to charity.
Upon the trust’s termination, the remaining assets pass to the designated charity. This strategy can effectively reduce the taxable estate while supporting philanthropic goals. Explore how a charitable remainder trust could fit into your overall estate and charitable giving plan.