Estate and Trust Tax Planning Basics

April 17, 2026

Estate and trust tax planning is one of those topics people avoid until it's too late. The math isn't complicated — but the rules are, and the stakes are enormous. A well-structured estate plan can save millions in taxes. A poorly structured one (or no plan at all) can hand 40%+ of your wealth to the IRS instead of your family. Here are the fundamentals every high-net-worth individual and business owner needs to understand in 2026.

The Federal Estate Tax: Where Things Stand in 2026

Current Exemption

The federal estate tax exemption for 2026 is approximately $13.6 million per individual and $27.2 million for married couples (using portability). Estates below this threshold owe no federal estate tax. Estates above it are taxed at a top rate of 40% on the excess.

The Sunset Problem

The Tax Cuts and Jobs Act of 2017 roughly doubled the exemption from $5.49 million to its current level. This increase is scheduled to sunset after 2025, which would drop the exemption to approximately $7 million per individual (adjusted for inflation). Whether Congress extends the higher exemption remains uncertain as of early 2026.

This creates urgent planning considerations. If the exemption drops to $7 million:

• An estate worth $10 million would go from owing zero estate tax to owing approximately $1.2 million
• A $20 million estate would owe roughly $5.2 million instead of $2.56 million
• Married couples with combined estates of $14-27 million move from fully exempt to partially taxable

The IRS has confirmed that gifts made under the higher exemption will not be "clawed back" if the exemption later decreases. This means transferring assets now — while the exemption is high — locks in the tax benefit regardless of future legislation. This is the single most important planning opportunity in estate tax for 2026.

Gifting Strategies: Moving Wealth Tax-Free

Annual Gift Tax Exclusion

The simplest estate reduction strategy: you can gift up to $19,000 per recipient per year in 2026 without gift tax consequences or even reporting requirements. A married couple can give $38,000 per recipient through "gift splitting."

The math adds up over time. A couple with three children and their spouses (six recipients) can move $228,000 per year out of their estate. Add six grandchildren and that becomes $456,000 per year — all without touching the lifetime exemption. Over 10 years, that's $4.56 million transferred tax-free.

Lifetime Gift Tax Exemption

Beyond annual exclusion gifts, you can use your lifetime gift/estate tax exemption ($13.6 million in 2026) to make larger gifts during your lifetime. Every dollar used for lifetime gifts reduces your estate tax exemption at death — they share one unified exemption. However, lifetime gifts of appreciating assets are often more tax-efficient than leaving them in your estate, because future appreciation occurs outside the estate.

Gifts of Appreciating Assets

Gifting assets expected to appreciate — private business interests, real estate, investment portfolios — is more powerful than gifting cash. If you gift $5 million of stock that grows to $15 million by your death, you've effectively moved $15 million out of your estate while using only $5 million of exemption. This "freezing" of value is a cornerstone of estate planning for business owners.

Tuition and Medical Payments

Payments made directly to educational institutions for tuition or to medical providers for medical expenses are completely excluded from gift tax — they don't count against either the annual exclusion or the lifetime exemption. A grandparent paying a grandchild's $60,000/year college tuition directly to the university can do so tax-free, in addition to the $19,000 annual exclusion gift.

Irrevocable Trusts: The Primary Estate Tax Reduction Tool

Irrevocable trusts are the workhorses of estate tax planning. By transferring assets to a properly structured irrevocable trust, you remove them from your taxable estate — permanently. The key types:

Irrevocable Life Insurance Trust (ILIT)

Life insurance proceeds are income-tax-free to beneficiaries, but they're included in your taxable estate if you own the policy. An ILIT owns the policy instead. You fund the trust with annual gifts to pay premiums (using annual exclusion gifts via Crummey powers). At death, the insurance proceeds pass to beneficiaries free of both income tax and estate tax. For a $5 million life insurance policy, an ILIT saves $2 million in estate taxes (at the 40% rate).

Grantor Retained Annuity Trust (GRAT)

A GRAT allows you to transfer appreciating assets to a trust while retaining an annuity payment for a set term. If the assets appreciate more than the IRS assumed rate (the Section 7520 rate), the excess appreciation passes to beneficiaries gift-tax-free. A "zeroed-out" GRAT — where the annuity payments equal the initial gift value — costs essentially zero exemption while transferring all appreciation above the 7520 rate. GRATs are especially popular for transferring private company stock before a liquidity event.

Spousal Lifetime Access Trust (SLAT)

A SLAT is an irrevocable trust created by one spouse for the benefit of the other spouse (and potentially descendants). It removes assets from the grantor's estate while maintaining indirect access through the beneficiary spouse. In the current high-exemption environment, SLATs are extremely popular — they allow couples to use their elevated exemptions while maintaining some access to the transferred wealth. The risk: if the beneficiary spouse dies or the couple divorces, access to the trust assets may be lost.

Qualified Personal Residence Trust (QPRT)

A QPRT transfers your home to a trust at a discounted gift tax value while you retain the right to live in it for a set term. If you survive the term, the home (and all subsequent appreciation) passes to beneficiaries outside your estate. For a $2 million home, a QPRT can reduce the taxable gift to $800,000-$1.2 million depending on the term length and interest rates. The tradeoff: if you die during the term, the home is pulled back into your estate and the strategy fails.

Generation-Skipping Transfer Tax (GST)

The GST tax is a trap for the unaware. It's a separate 40% tax imposed on transfers to "skip persons" — typically grandchildren or more remote descendants — designed to prevent wealthy families from avoiding estate tax at each generation by skipping one.

How GST Tax Works

Without GST planning, a transfer to grandchildren could face:

• Estate or gift tax: 40% at the first generation
• GST tax: 40% of the remaining amount at the skip generation
• Combined effective rate: up to 64%

GST Exemption

Like the estate tax, there's a GST exemption of $13.6 million per individual in 2026. This exemption can be allocated to trusts that benefit grandchildren and more remote descendants, shielding those transfers from the GST tax. Proper allocation of GST exemption is one of the most technical areas of estate tax planning — errors can be extremely expensive and are often irreversible.

Dynasty Trusts

Some states (including Nevada, South Dakota, and Delaware) permit trusts that last indefinitely — "dynasty trusts." By allocating your GST exemption to a dynasty trust, you can theoretically shelter assets from estate and GST tax for multiple generations. A $13.6 million dynasty trust growing at 7% annually could be worth over $100 million in 30 years — all free of estate and GST tax at every generation.

Trust Income Taxation: The Compressed Bracket Problem

Trusts that retain income face severely compressed tax brackets. In 2026, a trust reaches the top 37% federal bracket at only approximately $15,200 in taxable income — compared to $609,350 for an individual. This means undistributed trust income is taxed at the highest rates almost immediately.

Strategies to mitigate this include:

• Distributing income to beneficiaries in lower tax brackets (the trust gets a deduction, the beneficiary reports the income)
• Investing for growth rather than income within the trust (unrealized appreciation isn't taxed until sold)
• Using grantor trust status where the grantor pays income taxes on trust income (effectively an additional tax-free gift to the trust beneficiaries)
• Timing distributions to years when beneficiaries have lower income

State Estate Taxes: Don't Ignore Them

Twelve states and the District of Columbia impose their own estate taxes, often with much lower exemptions than the federal level:

• Oregon: $1 million exemption
• Massachusetts: $2 million exemption
• Illinois: $4 million exemption
• New York: $6.94 million exemption (with a "cliff" — if the estate exceeds 105% of the exemption, the entire estate is taxable)
• Washington: $2.193 million exemption, with rates up to 20%

If you live in a state with its own estate tax, your CPA and estate attorney need to coordinate federal and state planning. Some strategies that reduce federal estate tax may not reduce state estate tax, and vice versa.

The CPA's Role in Estate Planning

Estate planning is a team effort. The estate planning attorney creates the legal structures — trusts, wills, entity agreements. The CPA handles the tax side:

• Modeling tax scenarios: What's the estate tax liability at current values? Under a sunset scenario? After planned gifts?
• Preparing Form 706: The federal estate tax return — one of the most complex returns in the tax code
• Preparing Form 1041: Annual income tax returns for trusts and estates
• Valuation support: Working with appraisers to establish and defend valuations for closely-held businesses, real estate, and other hard-to-value assets
• Gift tax returns (Form 709): Required for gifts exceeding the annual exclusion or for certain trust transfers
• GST exemption allocation: Ensuring GST exemption is properly allocated on gift and estate tax returns

If your estate is anywhere near the current or potential future exemption threshold, working with a CPA experienced in estate and trust taxation is essential. The cost of planning is a fraction of the cost of getting it wrong. Start early — the best estate tax strategies take years to fully implement.