Should You Worry About Death Tax Liabilities?
If you own real estate, investment accounts, or significant personal property and wish to transfer those assets to your loved ones, at a minimum, you need a will. But a comprehensive estate plan does more than just distribute assets, it anticipates and mitigates potential tax liabilities that could reduce the legacy you intend to leave behind.
A recent Go Banking Rates article, “Inheritance Tax 2025: Rates, Exemptions and How to Avoid It,” underscores the importance of proper planning. Even if your estate falls below the current federal estate tax exemption—$13.9 million for 2025—it may still be subject to state-level inheritance taxes, which are imposed independently of federal rules.
Which States Impose Inheritance Taxes?
Several states continue to levy inheritance taxes, which may be paid by the heirs rather than by the estate. Maryland and Pennsylvania, for example, impose such taxes. If you reside in one of these states, or have beneficiaries who do, it is essential to take proactive steps to avoid saddling your heirs with unexpected tax burdens.
Strategies to Minimize or Eliminate Estate and Inheritance Taxes
Fortunately, there are several legal strategies available to reduce, or in some cases eliminate, estate and inheritance tax exposure. These include:
1. Lifetime Gifting
The federal annual gift tax exclusion allows individuals in 2025 to give up to $19,000 per recipient without triggering gift tax or IRS reporting obligations. Married couples can combine their exclusions to gift up to $38,000 per person per year.
Larger lifetime gifts can further reduce the size of your taxable estate. While these may count against your federal lifetime estate tax exemption, many states with inheritance taxes do not impose tax on lifetime gifts, making gifting a useful planning tool.
2. Trust-Based Planning
Trusts can be instrumental in removing assets from your taxable estate. The type of trust selected depends on your specific planning goals:
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Irrevocable Trusts: Transfer ownership of assets out of your estate, although they require relinquishing control over those assets.
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Qualified Personal Residence Trusts (QPRTs): Allow you to transfer a residence to heirs at a reduced gift tax cost.
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Bypass Trusts (Credit Shelter Trusts): Commonly used by married couples to fully utilize both spouses’ estate tax exemptions and reduce overall tax exposure.
Proper trust selection and implementation require careful drafting and should be handled by an experienced estate planning attorney to ensure tax efficiency and legal validity.
3. Charitable Giving
Charitable contributions made to qualified 501(c)(3) organizations are fully exempt from estate and inheritance taxes. Options for charitable giving include:
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Outright Bequests: Gifts made through your will.
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Lifetime Donations: Gifts made during your lifetime may also carry current-year income tax benefits.
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Charitable Trusts:
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Charitable Remainder Trusts (CRTs) provide income to your heirs for a fixed period, after which the remainder goes to charity.
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Charitable Lead Trusts (CLTs) do the reverse, providing income to a charity first, with the remainder passing to your heirs.
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Estate and inheritance tax laws are complex, frequently changing, and vary significantly from state to state. To ensure that your legacy is preserved and your heirs are protected from unnecessary tax burdens, consult with an experienced estate planning attorney.
At Sims & Campbell, we help individuals and families navigate the legal and tax implications of wealth transfer with clarity, compassion, and precision. Schedule a consultation to understand your estate tax obligations and create a tailored plan that aligns with your goals.
Reference: Go Banking ( April 14, 2025) “Inheritance Tax 2025: Rates, Exemptions and How to Avoid It”