Many of our clients are worried about estate tax. Under current regulations, not many Americans will owe estate tax: you will only pay estate tax if you die with, or have given away, $13.6 mm. Married couples effectively get double that as an exemption. But many high-net-worth individuals fear the estate tax net could trap a lot more Americans in the future, for two reasons:

1. The $13.6 mm exemption is scheduled to be cut by 50% after 2025 unless Congress acts.
2. Congress could potentially lower it further. Be aware: the exemption is as high as it’s ever been. For example, 30 years ago, it was $600,000.

If you worry you may be subject to estate tax, here are three easy steps you can take. They may not entirely solve your problem, but they can make a huge dent in the estate tax due when you pass away.

1. Disciplined annual gifting to the next generation. As of 2024, you can give anyone up to $18,000 annually without any impact on estate tax. Giving someone more than that does reduce your lifetime exemption, dollar-for-dollar. But the first $18,000 gifted to anyone is ignored. A little math demonstrates how much you can give away free of estate tax. Imagine you have three children, each married, and four grandchildren. That’s ten recipients. In 2024, if you are married, you and your spouse can give $36,000 to one person, or $360,000 to ten recipients. Over 20 years, you can reduce your estate by $7+ mm – and save almost $3 mm in estate tax, assuming today’s 40% tax rate. Nothing fancy here – no irrevocable trust, no amending your own estate plan.
2. Name charities as your retirement account beneficiaries. If you want to leave a portion of your estate to non-profits, it’s best to give retirement plan assets. That’s because non-profits won’t owe tax if you leave them your pre-tax IRA or 401k. But your kids or other individuals will – and they will have to take all the money out within 10 years, making the tax bill hit over a short period. If you are worried you will owe estate tax, that’s a double whammy. You will owe estate tax on the gross amount of your IRA – even the future tax bill your kids will pay when they are forced to withdraw from the IRA. By contrast, your kids can inherit your brokerage account, your house and many other assets without the double tax hit.
3. Help your relatives by paying for their education or medical expenses. Another way to reduce your taxable estate is by paying for someone’s educational or medical expenses. That support is on top of the $18,000 annual limit per recipient. You can only pay for tuition, and the payment must go directly to the school. Similarly, you can pay for someone’s health care expenses on top of the annual gifting limit, if you pay the care provider or insurance company directly.

A very small percentage of Americans should be taking more than the three steps listed above. There is a menu of complex trusts and products which can make sense, despite the hassle involved. But for many high-net-worth individuals, all that’s needed to avoid estate tax is a little advanced planning and disciplined follow-through.