If you hope to leave a large legacy for future generations, the possibility of estate tax might be on your radar. With a maximum estate tax rate of 40%, a significant portion of the wealth you leave behind could end up going to taxes instead of to your heirs.
The good news is that the IRS offers an estate tax exemption, which protects the majority of taxpayers from this tax liability, and recent wide-sweeping tax legislation has made it possible for more taxpayers to transfer wealth tax-free in the future.
Let’s take a look at what’s going on with the estate tax exemption limit, plus four strategies for transferring wealth effectively before and after death.
In 2017, the Tax Cuts and Jobs Act (TCJA) was passed, marking one of the largest tax reform acts in recent history. Notably, the TCJA doubled the estate tax exemption limit from $5.49 million in 2017 to $11.18 million in 2018 for single filers, or $22.36 million for joint filers. Each year, the elevated exemption limit was adjusted for inflation.1
This legislation presented an advantage for high-net-worth individuals and couples, as more of their estate could be passed on to their intended heirs (rather than the government). Originally intended to be a temporary benefit for affluent families, the raised exemption limit, along with many other provisions outlined in the TCJA, was set to expire at the end of 2025.
However, the One Big Beautiful Bill Act (OBBBA) was signed into law on July 4, 2025 by President Trump. Marking yet another historically large piece of tax reform legislation, the OBBBA has extended the majority of the provisions, including the higher estate tax exemption limit. As of 2025, the federal estate and gift tax exemption is $13.99 million per individual and $27.98 million for couples.1
Federal estate tax is a tax imposed on the total value of a person’s property and assets at the time of their death. The tax applies to the estate (not the person inheriting it), meaning heirs aren’t personally responsible for paying the tax. Rather, estate tax reduces the size of the estate before the wealth is transferred into the hands of your heirs.
Not every estate is subject to estate taxes, and the tax only applies to the portion of the estate that exceeds the exemption limit. For example, if your estate is worth $12 million, it wouldn’t be subject to federal estate taxes in 2025. If your estate is worth $16 million, only the approximate $2 million over the exemption limit would be subject to federal estate taxes.
A few states impose their own estate and/or inheritance taxes as well. Just like the federal level, state estate tax is the responsibility of the estate (not the heir). Inheritance tax, however, is imposed on the person receiving the inheritance. Most states (but not all) set their own exemption limits as well, many of which parallel the federal limits.
The states currently imposing either an estate tax, an inheritance tax, or both include:2
Along with estate taxes, the IRS imposes a federal gift tax as well.
The annual gift tax exclusion allows you to give up to $19,000 per beneficiary (married couples can give up to $38,000) as of 2025.3 Should you give a beneficiary (child, grandchild, etc.) more, it’ll need to be reported on your tax return—but only the amount above the annual limit. That excess amount will then be deducted from your lifetime gift exemption limit, which is essentially the same as your estate tax exemption limit. In other words, you can’t easily “gift” away your entire estate to your children right before death as a way to avoid estate tax.
Let’s say you gift $15,000 to your grandchild this year. Because it’s below the $19,000 limit, you won’t have to report it on your returns, and your lifetime gift exemption and estate tax exemption limit remain the same.
Now let’s say you gift $100,000 to your grandchild this year. You will be required to report the $81,000 over the exemption limit to the IRS, and it will be deducted from your lifetime exemption limit. Assuming this is the first time you’ve gone over the annual gifting limit, your exemption drops from $13.99 million to $13.98 million for 2025 (but keep in mind the lifetime limit is indexed for inflation each year).
The estate tax exemption limit is at a historic high and should remain that way for the foreseeable future. That being said, families with sizable estates may still need to plan proactively for potential estate tax challenges—especially considering future legislation changes are possible.
With a high estate exemption limit to work to your advantage, here are four strategies for transferring wealth effectively before and after death.
Roth accounts have the potential to produce tax-free income in retirement and serve as effective wealth transfer tools for your heirs.
As a quick reminder, Roth accounts are funded with after-tax dollars, meaning there no tax advantages for contributions. The trade-off is the potential to enjoy tax-free withdrawals in retirement, as long as you meet the holding and age requirements.
When your loved ones inherit a Roth account, they can make qualified withdrawals tax-free as well. This, combined with the historically high estate tax exemption limit, can make Roth accounts an especially tax-effective opportunity for transferring wealth.
If you have significant savings sitting in a traditional 401(k) or IRA, consider the potential tax benefits and drawbacks of a Roth conversion. This would essentially convert a portion of your tax-deferred retirement accounts into a Roth after-tax account. You’ll owe taxes on the amount transferred to the Roth account in the year the conversion takes place, but the long-term advantages may be worth it (depending on your full tax situation and wealth transfer goals).
Once the funds are converted to a Roth account, they won’t be subject to required minimum distributions (RMDs). In fact, the funds in a Roth account can stay put for as long as you want—again, making them especially attractive for estate planning.
An irrevocable trust can be a powerful estate planning tool for some families.
Trusts can get complicated, but here’s the basics of how they work: Assets placed in an irrevocable trust are separated from your estate, meaning they won’t count toward your taxable estate when you pass away, which may help reduce estate taxes. However, the “irrevocable” part means once assets are put into the trust, they can’t be removed.
While trusts can offer strong asset protection and possibly limit estate taxes, there are notable tradeoffs worth considering. They tend to lack flexibility, and the cost of establishing and managing a trust may potentially negate the tax benefits, depending on the size and scope of your estate.
The annual gift tax exclusion for 2025 is $19,000 per beneficiary—the key here being “per beneficiary.” You aren’t limited to how many people you gift to, only how much you gift per person.
If you want to gift $19,000 to 10 family members, that’s $190,000 of your estate transferred tax-free. Multiply this across several years, and you can bring down the size of your estate significantly. Plus, gifting during your lifetime can be a rewarding experience, since you’re still around to see your family enjoy their inheritance—or use it for specific purposes, like buying a home or planning a wedding.
If you’d like to gift more, the IRS does offer some gift exclusions. Namely, you can give money directly to an educational institution (like a college or private school) or a medical facility without impacting the annual gifting limit. As long as you make a direct payment on behalf of your loved one, your gift will be excluded.3 This is a thoughtful way to gift to your children or grandchildren while reducing the size of your estate, all without tax liability.
Certain policies, like life insurance and annuities, can help provide meaningful (and sometimes tax-advantaged) benefits for your loved ones after death.
In general, life insurance payouts aren’t subject to tax, meaning the full benefits go directly to your beneficiaries. If your loved one receives a death benefit from an annuity, the proceeds may be subject to ordinary income tax, depending on how the annuity was established and funded.
These policies don’t decrease the size of your estate, but they still offer an effective way to pass significant wealth onto your heirs.
The OBBBA extended and created quite a few tax provisions, many of which will impact millions of taxpayers over the coming years. For high earners or families with sizable estates, the elevated estate tax exemption limit presents a greater opportunity for transferring wealth tax-free.
That being said, your estate could still be subject to state-level estate or inheritance taxes, depending on where you live.
By preparing ahead of time, you can leave a powerful legacy of wealth that empowers your future heirs. Consider working with a financial advisor and estate attorney to build out a personalized estate plan that takes recent tax law changes into account.