Minimize Estate Taxes Through Smart Estate Planning

Estate taxes are sometimes called a “death tax” because they are taxes imposed on the estate (money, property, and assets) of someone who has died. Not everyone has to pay estate taxes. In fact, most people won’t, because there are exemption limits that shield a certain amount of an estate’s value from taxation. However, for those with substantial assets – including many homeowners in high-cost areas like California – careful estate planning can help minimize or even eliminate any estate tax due. This article explains what estate taxes are at the federal level and in California, and outlines practical strategies to reduce estate tax exposure. We will also discuss key tools like gifting, trusts, valuation discounts, charitable giving, exemptions, step-up in basis, and portability, as well as common mistakes to avoid. The goal is to present straightforward guidance in plain language, so you can plan effectively and keep more of your wealth in the family.

What Are Estate Taxes and When Do They Apply?

An estate tax is a tax on the right to transfer property at death. It’s calculated based on the net value of everything owned by the deceased (the “estate”) before those assets pass to heirs. The federal government imposes an estate tax if the estate’s value exceeds a certain threshold (called the estate tax exemption). Some states also have their own estate taxes or inheritance taxes. Inheritance tax is different – it’s a tax on the beneficiaries receiving the inheritance, and it depends on state laws. Fortunately, California has neither an estate tax nor an inheritance tax as of 2025. This means if you’re a California resident, only the federal estate tax rules will generally apply to your estate (unless you own property in a state that does have an estate or inheritance tax).

Federal estate tax only affects estates above the exemption amount, and it uses a graduated rate schedule. The federal estate tax exemption is very high right now – $13.99 million per individual in 2025 (almost $28 million combined for a married couple with proper planning). In other words, a person can leave up to $13.99 million to heirs and pay no federal estate tax, and a married couple can potentially leave nearly $28 million tax-free. This historically high exemption was set by the 2017 Tax Cuts and Jobs Act and adjusted annually for inflation. Any value of an estate above the exemption is taxed at rates up to 40%. Because of the high exemption, only a small percentage of very large estates currently owe federal estate tax.

However, this situation is due to change after 2025. The law that boosted the exemption is scheduled to expire at the end of 2025, meaning that in 2026 the federal estate tax exemption will drop to roughly half its current level. Unless Congress acts to change the law, the exemption will revert to a base of $5 million per person (adjusted for inflation, around $7 million in 2026). The top tax rate would remain 40%. This pending change is often called the “2025 sunset” of the estate tax provisions. Many more families could be impacted once the exemption decreases. While $5–7 million may still sound high, consider that in a place like California, a house plus retirement accounts and life insurance can easily put an estate over that mark. For example, a California home combined with other assets could push an estate above $5 million, which at a 40% estate tax rate would create a significant tax burden​. (findlaw.com)

In short, starting in 2026 a lot more middle- to upper-middle-class Californians could face federal estate tax exposure. This makes now a critical time to review your estate plan and look for ways to minimize future estate taxes under the lower exemption.

California estate tax: California does not impose a separate state estate tax. It hasn’t had one since 2005, and as of 2025 there is still no California estate tax regardless of the size of the estate. California also has no inheritance tax on beneficiaries. This is good news for residents – it means there’s no extra layer of tax at the state level. (By contrast, about a dozen other states do still have estate or inheritance taxes with their own lower exemptions.) California voters have occasionally seen proposals for a state estate tax (often tied to funding education or other programs), but none are in effect now. So the primary concern for Californians is the federal estate tax.

That said, California’s high property values and high concentration of wealth mean that many estates here are larger than in other parts of the country. Even without a state tax, a larger share of Californians could owe federal estate tax, especially after 2025 when the federal exemption shrinks. Additionally, very wealthy individuals in California might also need to consider generation-skipping transfer (GST) tax if they plan to leave assets to grandchildren or beyond, since GST tax has its own exemption (which is equal to the estate tax exemption) and can apply on top of estate tax for transfers skipping a generation. For most people, though, the key thresholds to watch are the federal estate tax exemption and the annual gift tax exclusion (which we will discuss below).

To summarize, estate tax applies at the federal level only if an estate’s net value exceeds the current exemption (nearly $14 million in 2025). Anything above that could be taxed up to 40%. California has no additional estate tax. Because the federal exemption is scheduled to drop in 2026, estate planning is important for individuals and couples who expect their estates might be over the future exemption (around $7 million per person). Next, we’ll turn to strategies that can help reduce the taxable value of your estate or otherwise minimize the impact of estate taxes.

Using Exemptions, Deductions, and Portability

Before diving into specific tactics, it’s important to understand the key exemptions and deductions built into the estate tax system. These are provisions that allow you to pass on wealth up to certain limits tax-free. Good estate planning makes full use of these rules:

• Lifetime Estate and Gift Tax Exemption: The IRS gives each person a large lifetime exemption from estate and gift taxes. This covers transfers made at death or as gifts during life, in any combination. As noted, this unified exemption is $13.99 million per person in 2025. If you are married, you each have your own exemption. If one spouse dies and does not use up their exemption, what remains can potentially carry over to the surviving spouse (we’ll cover this “portability” feature shortly). Remember, however, that the exemption is slated to drop by about half after 2025. Using as much of your exemption as possible now, while it’s higher, is a common strategy for wealthy individuals. For example, some people make large tax-free gifts or set up trusts in 2024–25 to lock in the use of the $13.99 million exemption before it falls to ~$7 million. Any portion of the exemption not used during life can be used to shield assets at death. Estates below the exemption amount do not owe any federal estate tax.

• Annual Gift Tax Exclusion: Apart from the big lifetime exemption, there is also an annual gift tax exclusion. This lets you give away a certain amount per recipient each year without even touching your lifetime exemption. In 2025, you can give $19,000 per recipient per year without filing a gift tax return or reducing your lifetime exemption. Married couples can effectively double that to $38,000 per recipient by splitting gifts (each spouse gives $19k). These annual exclusion gifts are a powerful way to gradually reduce the size of your estate over time. For instance, if you have three children, you and your spouse together could give each child $38k per year, removing $114k from your estate annually – all tax-free and without using any of your $13.99M exemption. Over a decade, that’s over $1 million passed on tax-free through a simple strategy. The annual exclusion amount is indexed to inflation, so it has risen from $15,000 a few years ago to $19,000 in 2025 (and could increase further in the future). One tip: you can also directly pay someone’s tuition or medical bills on their behalf, and those payments do not count toward the $19k annual limit – they are entirely excluded if paid directly to the institution. That’s another way to help family members while reducing your estate, free of tax.

• Unlimited Marital Deduction: If you are married and your spouse is a U.S. citizen, you can leave any amount of assets to your spouse with no estate tax at all thanks to the unlimited marital deduction. The marital deduction allows one spouse to transfer an unrestricted amount to the surviving spouse at death, free of estate tax. Essentially, the IRS treats married couples as one economic unit for estate/gift tax purposes when transferring between themselves. This means a first spouse’s death can be structured so that their entire estate goes to the surviving spouse and no estate tax will be due at that time (no matter the size of the estate). The assets would then be part of the surviving spouse’s estate and potentially taxable at the second death. The marital deduction is a great tool for deferring taxes until the second death, and combined with “portability” it can also ultimately eliminate taxes for many couples. Note: If your spouse is not a U.S. citizen, the unlimited marital deduction doesn’t apply – there are other techniques (like Qualified Domestic Trusts) in that scenario, but that’s beyond our scope here.

• Portability of Exemption: The concept of portability is very important for married couples’ estate planning. Portability means that if one spouse dies and doesn’t use up their full federal exemption, the unused portion can be transferred to the surviving spouse. The surviving spouse can then add that to their own exemption. For example, if Husband dies in 2025 and uses $3 million of his $13.99M exemption (perhaps by leaving $3M to kids, with the rest to his wife), the remaining $10.99M unused can go to Wife. Wife would then have her own $13.99M exemption plus the $10.99M from Husband, for a total of almost $25M she can pass tax-free. Portability effectively allows a married couple to use two exemptions without complicated trusts – similar to just doubling the exemption for the couple. In practice, married couples in 2025 can shield up to about $27–28 million combined from estate tax. It’s crucial to know that portability is not automatic. The executor of the first spouse’s estate must file an estate tax return (Form 706) and elect portability at the time of the first death, even if no tax is owed. This is usually done by filing within 9 months of death (or within any extension). Failing to do so is a common mistake – if no estate tax return is filed for the first spouse because the estate was under the exemption, the surviving spouse loses the ability to claim that unused exemption. So, even if you think you won’t owe tax when the first spouse dies, it is often wise to file a protective estate tax return to secure the unused exemption for the future. Portability has been part of the tax law permanently since 2013, and it greatly simplifies estate planning for many couples. One other benefit: with portability, assets that pass outright to a spouse get included in the surviving spouse’s estate, meaning those assets can receive a step-up in basis at both deaths (we’ll explain step-up in basis later). By contrast, older planning with irrevocable bypass trusts could cause the assets in the trust to bypass taxation (good for estate tax) but also bypass any second step-up in basis (potentially less optimal for capital gains tax). Modern estate plans often try to balance these considerations.

In summary, you want to maximize the use of these exemptions and deductions. That means: use your annual gift exclusions each year if you can afford to, consider larger lifetime gifts or transfers to use your $13.99M exemption before it drops, ensure assets passing to a spouse qualify for the marital deduction, and make sure to file for portability if needed. By using these provisions fully, many estates can legally avoid estate tax altogether. The next sections will explore additional strategies when an estate is still expected to exceed the exemption or when there are other planning goals.

Lifetime Gifting to Reduce Your Taxable Estate

One of the simplest and most effective ways to minimize estate taxes is to reduce the size of your taxable estate during your lifetime. Every dollar you manage to give away before you die – either to your loved ones or to charity – is a dollar that won’t be subject to estate tax at your death. Of course, you need to do this in a tax-efficient way and without compromising your own financial security. We’ve already mentioned the annual gift tax exclusion ($19,000 per recipient in 2025) which is a primary tool for tax-free giving. By using the annual exclusion consistently, you can transfer significant wealth over time. For example, grandparents might systematically give gifts to children and grandchildren each year. Not only does this help those family members now, it also chips away at the grandparents’ estate so it may fall below the taxable threshold later.

Beyond the annual exclusion gifts, you can also dip into your lifetime exemption to make larger gifts. This is often called an estate “freeze” or reduction strategy – you remove assets now that you expect will appreciate in the future, so that future growth happens outside your estate. For instance, if you have a business or stock worth $5 million that you think could double in value, you might gift it to your heirs (or to a trust for their benefit) now. That uses up $5M of your exemption today, but if the asset grows to $10M by the time you die, that entire growth is out of your estate (saving estate tax on the $5M of appreciation). This can be done outright or via trusts and family entities which we will discuss. Keep in mind any gifts beyond the annual exclusion require filing a gift tax return and count against your lifetime $13.99M exemption. There is no tax due at the time of the gift unless you exceed your exemption.

It’s important to balance your own needs when gifting. Don’t give away assets you might need for your living expenses or healthcare. Also consider the income tax implications: appreciated assets get a step-up in basis at death, but if you gift them before death, the recipient takes over your original basis (potentially leading to capital gains tax if they sell). In plain terms, giving away property during life could mean forfeiting a valuable capital gains tax break (step-up) for your heirs. We’ll elaborate on the step-up in basis later, but always weigh estate tax savings against potential income tax cost. If your estate is well above the exemption, reducing it is priority; if it’s around the borderline, you might lean toward holding assets for step-up rather than gifting. In any case, lifetime gifting – whether small annual gifts or larger transfers – is a cornerstone of estate tax planning. It can both shrink your estate and bring you the joy of seeing your loved ones benefit from your gifts while you’re alive.

Aside from personal gifts, another form of giving is charitable contributions. Gifts to qualified charities are not subject to gift tax and are fully deductible from your estate at death. If philanthropy aligns with your values, you can donate part of your estate to charity and simultaneously reduce estate taxes. Some people set up charitable trusts (like a Charitable Remainder Trust or Charitable Lead Trust) that allow split benefits between charity and family – these can provide an income stream to either the donor or heirs and leave the remainder to charity, with significant tax advantages. Donating to charity is essentially another way of removing assets from the estate tax base while doing good. Large charitable bequests or lifetime donations can dramatically cut down an estate’s taxable value and may also yield income tax deductions during life. The trade-off is that those assets won’t go to family, of course, but for charitably inclined folks, it’s a win-win: support causes you care about and lower taxes on your estate.

Trusts and Estate Freezing Techniques

Trusts are indispensable tools in estate planning, especially when it comes to reducing estate taxes. A trust is a legal arrangement where one party (a trustee) holds and manages assets for the benefit of others (beneficiaries). Certain types of trusts can remove assets from your taxable estate, while still allowing you some control or benefit and protecting the assets for your heirs. Here are key trust strategies:

• Revocable Living Trust – First, to clear a common misconception: a standard revocable living trust (which many people use to avoid probate and manage assets) does not reduce estate taxes. Because it’s revocable (you can change or cancel it) and you still control the assets, the IRS treats assets in a revocable trust as still yours for tax purposes. When you die, assets in a revocable trust are included in your estate just like assets in your own name. The main benefits of a revocable trust are avoiding probate and providing continuity in asset management, not tax savings. Some people think putting assets in a living trust avoids estate tax – it doesn’t. Only irrevocable transfers generally move assets out of your estate.

• Irrevocable Trusts – An irrevocable trust is a trust you generally cannot change or cancel once it’s set up (at least not without difficulty). When you transfer assets into an irrevocable trust, you give up control and ownership of those assets. Since you no longer own them, they are typically not counted in your estate for estate tax purposes (assuming the trust is properly structured). This is how irrevocable trusts can reduce estate taxes. You might ask: why would I give up my assets? Often it’s done to benefit children or other heirs in the long run. For example, you could place investments into an irrevocable trust that names your children as beneficiaries. You might not have access to those assets anymore, but any future growth or income can go to your kids (either during your life or after your death) and those assets won’t be hit by estate tax when you die. One common type is a Dynasty Trust – an irrevocable trust designed to last for generations, benefiting children, grandchildren, etc., while avoiding estate tax at each generation. Another very useful irrevocable trust is the Irrevocable Life Insurance Trust (ILIT). If you own a life insurance policy on yourself, the death benefit is part of your taxable estate if you had any “incidents of ownership” in the policy (like the ability to change beneficiaries). That can surprise people – a $1 million life insurance payout could add $1M to your estate value for tax. By creating an ILIT and having the trust own your life insurance policy, the insurance proceeds will not be included in your estate. The ILIT receives the insurance money at your death and then distributes it (or holds it) for your heirs as you direct. This way, you provide liquidity (often used to help pay any estate tax that is due) but keep the insurance outside the taxable estate.

• Grantor Retained Annuity Trust (GRAT) – A GRAT is an advanced planning tool that is particularly effective for assets likely to appreciate. You, the grantor, put assets (say stocks or business interests) into the trust but retain the right to an annuity payment for a set number of years. Essentially, the trust will pay you back a portion of the assets plus some interest over the term. After the term, whatever is left in the trust goes to your beneficiaries as a gift. The trick is that the “gift” to the heirs is valued at the time of creation assuming a certain IRS interest rate. If the assets actually grow more than the assumed rate, all that extra growth passes to the heirs tax-free. If you outlive the trust term, those assets are out of your estate. A GRAT is a way to “freeze” the majority of an asset’s value in your estate by retaining an annuity, while transferring the upside growth to the next generation with little or no gift/estate tax cost. GRATs are especially popular when interest rates are low and asset values are depressed (giving more room for upside). They do require careful setting of terms and legal guidance, but they are a proven strategy. For example, a tech founder might put pre-IPO shares into a GRAT; if the shares skyrocket, the gain goes to family members free of estate tax. Note: If the grantor dies during the GRAT term, some or all of the assets revert to the estate, so timing and health considerations are factors.

• Qualified Personal Residence Trust (QPRT) – A QPRT is a specific type of irrevocable trust for your home. If you own a house that you expect to increase in value, you can place it into a QPRT while retaining the right to live in it for a number of years (that you choose). During that retained period, you continue to live there as before. When the period ends, ownership of the house passes to your beneficiaries (often your children), but you can typically continue to live there as a tenant (usually renting it back at a fair rent, which is another way to give money to your kids). The benefit is that the house is valued for gift/estate tax at the time of transfer to the QPRT, minus the value of your retained right to live there. That valuation discount can be substantial. Any further appreciation on the house after it’s in the QPRT escapes estate tax. Essentially, a QPRT lets you make a future gift of your home at a discounted value, while still living in it. If you survive the QPRT term, the house (and its full future value) is out of your estate. If you don’t survive the term, the house is pulled back into your estate (so again, one has to plan with realistic time horizons). In a high-property-value state like California, a QPRT can be a way to transfer a pricey home to the next generation at a lower tax cost. It does mean giving up full ownership eventually, so it’s not for everyone – but for those comfortable with the arrangement, it can save a lot in taxes.

Each of these trusts – ILITs, GRATs, QPRTs, dynasty trusts, etc. – is a tool to remove assets from your estate at a low tax cost and thereby shelter future wealth from the estate tax. They are typically irrevocable, so you have to be sure and work with an experienced estate planning attorney to set them up correctly. The bottom line is that irrevocable trusts can shift wealth out of your taxable estate while still benefiting your family, and often can do so in a way that also provides asset protection (creditors of your beneficiaries usually can’t touch assets in a well-drafted trust) and controlled management of the assets over time according to your wishes. Trusts can be complex, but they are time-tested methods for the wealthy to minimize estate taxes.

Family Limited Partnerships and Valuation Discounts

Another strategy to reduce estate and gift taxes is to take advantage of valuation discounts when transferring interests in family-held entities. This often involves using a Family Limited Partnership (FLP) or a Family Limited Liability Company (LLC). The idea is that certain properties or businesses can be held inside a family-controlled entity, and then you transfer shares/units of that entity to your heirs, rather than transferring the assets outright. Because these transferred interests are minority stakes in a non-public entity, they are not worth as much as a proportionate share of the underlying assets would suggest (due to lack of control and lack of marketability). The IRS allows valuation experts to apply discounts for these factors, which can significantly reduce the value reported for gift and estate tax purposes.

Here’s how it works in a simplified example: Suppose you own a rental property worth $10 million. If you gave a 50% interest in that property outright to your child, that gift is valued at $5 million. But instead, you put the property into an FLP in which you own 100% of the partnership interests (say you are the general partner and limited partner initially). Now you give your child a 50% limited partnership interest. As a limited partner, your child cannot control the partnership (you, as general partner, control the property) and they can’t easily sell their interest (no one outside the family likely wants to buy into this illiquid partnership). Because of those restrictions, the real fair market value of that 50% limited partnership interest might be appraised at, say, only $3.5 million instead of $5 million. In other words, perhaps a 30% discount. The law recognizes that a minority slice of a closely-held entity is less valuable than the same slice of a freely traded asset. If the IRS accepts that valuation, you have effectively moved a $5 million economic interest for a tax value of $3.5 million. You’ve saved $1.5M of your exemption (or if you were over the exemption, you’d have saved 40% of that $1.5M in tax, which is $600k).

Family Limited Partnerships are commonly used to consolidate family assets (like real estate or a family business) and gradually gift or sell minority interests to the next generation at discounted values. The parents often keep a small general partner interest so they retain control over the assets even after giving away most of the equity – they “have their cake and eat it” to some extent, by keeping control while moving wealth to the kids at a lower tax cost. The IRS is aware of this technique and does scrutinize valuations, so it’s critical to use qualified appraisers and not be overly aggressive (huge unwarranted discounts can be challenged, and there are penalties for valuation misstatements). But reasonable discounts in the range of perhaps 15% to 40% have often been accepted, depending on the facts. For example, lack of marketability alone can justify a discount since there’s no ready market to sell a part-interest in a family business. Lack of control (minority interest) is another common discount because the limited partner can’t direct the business or force a sale.

It’s worth noting that FLPs and similar entities need to have a legitimate non-tax reason as well (such as joint management of family investments or protecting assets from creditors). If it’s purely a sham for tax discounts, the IRS can ignore it. But when done properly, family partnerships can both facilitate family succession and create tax leverage. You can start an FLP while you’re alive, gift small percentages to your children each year (leveraging the annual gift exclusion and your exemption with discounts), and even the act of being able to transfer ownership gradually without losing control is a big advantage. For instance, parents might gift minority FLP interests worth $36,000 (the annual exclusion for a couple) to each child every year. Because of valuation discounts, that $36k might represent, say, $50k worth of underlying assets each year that moves out of the estate. Over time, significant chunks of the estate can be transferred this way. Meanwhile, the parents as general partners still call the shots regarding the property or business in the FLP.

In summary, valuation discounts are a valuable tool to legally reduce the reportable value of gifts and estate transfers. Using entities like FLPs or LLCs can enable those discounts while allowing parents to maintain control during their lifetime. This is a more advanced strategy and requires professional guidance – proper legal structuring and professional appraisals – but it can yield substantial estate tax savings. Just be sure to follow all the formalities of running the partnership or LLC as a real entity, and don’t treat it as your personal pocketbook, or the benefits could be lost.

The Step-Up in Basis: Don’t Forget Income Tax Planning

A discussion of estate planning would be incomplete without talking about step-up in basis. This isn’t an estate tax concept per se, but it’s a crucial tax benefit that influences estate planning decisions. When someone dies, the assets in their estate (like stocks, real estate, etc.) typically receive a “step-up” in cost basis for income tax purposes. This means the asset’s cost basis is adjusted to its fair market value at the date of death. Why does that matter? Because when the heirs eventually sell that asset, capital gains tax will be computed using the stepped-up basis.

For example, say your father bought a house in California decades ago for $100,000, and at his death it’s worth $1,000,000. If he leaves it to you through his estate, the basis steps up to $1,000,000. If you sell it for $1,050,000 a year later, your capital gain is only $50,000 (the difference above the new basis). If there were no step-up and you inherited his original $100k basis, your capital gain on a $1,050,000 sale would be $950,000 – resulting in a much larger tax bill. The step-up in basis rule effectively wipes out the income tax on all the appreciation that occurred during the decedent’s lifetime. This is a huge tax break for beneficiaries of estates. It applies to most assets that appreciate in value (real estate, stocks, mutual funds, businesses, collectibles). Note that retirement accounts (IRA, 401k) and annuities don’t get a step-up (they have their own tax treatment), and life insurance is income-tax-free anyway. But for capital assets, the step-up is golden.

How does this play into estate tax planning? It creates a bit of a balancing act between estate tax vs. capital gains tax. On one hand, you may want to give away assets before death to beat the estate tax or to use your exemption. On the other hand, holding assets until death has the benefit of the step-up, which could save your heirs a lot of capital gains tax. The current law lets you have it both ways up to the exemption amount: you can die owning, say, $5 million of highly appreciated stock, and if your total estate is under the exemption, there’s no estate tax and your heirs get a stepped-up basis on those stocks (so no built-in capital gains tax either). The government essentially forgoes any tax on that appreciation. If instead you had given those stocks to your kids before death, you avoid estate tax but they take your original $100k basis and could owe a big capital gains tax later. So, if estate tax is not a concern for you (i.e. your estate is under the exemption), it usually makes sense to hold onto appreciated assets and let death eliminate the capital gains. Conversely, if your estate is far above the exemption, estate tax is the bigger threat, and you might be willing to forego some step-up benefit by transferring assets out of your estate.

One special note for married couples in community property states like California: Assets that are community property get a full step-up in basis on both halves when one spouse dies (as long as the asset was community property). In non-community property states, if spouses owned an asset jointly with right of survivorship, only the decedent’s half gets stepped up. California’s community property law can be very favorable: for example, a house or stock portfolio held as community property by a couple will have its entire basis stepped up to market value when the first spouse dies, even though the survivor still owns their half. This can eliminate capital gains if the survivor sells shortly after, or at least greatly reduce future capital gains when the asset is eventually sold. It’s an important tax benefit for Californians to remember in estate planning. The surviving spouse then could get another step-up on the remaining assets at their death (either via a trust or outright if using portability). The double step-up (one at each death) combined with portability of the exemption means a married couple can minimize both estate and income taxes with proper planning.

The key point is: estate planning is not just about estate taxes, but also about income taxes for your heirs. Always consider the step-up in basis when deciding which assets to gift and which to keep. Generally, you’d prefer to gift cash or high-basis assets and keep the low-basis, highly appreciated assets until death to take advantage of the step-up. Also, assets that produce taxable income might be good to remove from your estate (to shift the income to someone in a lower tax bracket), whereas assets that are just sitting and growing might be fine to hold. A comprehensive plan will weigh the estate tax saved by a strategy against any income tax cost it creates. With the estate tax exemption so high currently, many more families are affected by capital gains tax than by estate tax. But with the exemption declining soon, more people will have to navigate this trade-off.

Common Estate Planning Mistakes to Avoid

Estate planning is full of pitfalls, especially when it comes to taxes. Here are some common mistakes people make that can undermine their efforts to minimize estate taxes:

1. Procrastinating or Failing to Plan at All: The worst mistake is simply not having an estate plan or waiting too long to start. If you keep putting it off, you could lose the opportunity to use certain strategies (for instance, dying before implementing a plan or before using the high exemption). Or you might encounter a health issue that limits what you can do. Start planning early, even if you’re not super-wealthy. Plans can be adjusted as laws change or as your assets change. Also, failing to plan may lead to simple things like not having a will or trust, which won’t directly cause estate tax but can cause other legal headaches and costs that diminish your estate. To minimize taxes, you often need to act years in advance (like gradual gifting or setting up trusts that need time to work). Don’t wait until the eve of 2026 when the law changes; by then it might be too late to fully take advantage of the current rules.

2. Not Updating Beneficiary Designations: Certain assets pass by beneficiary designation – like life insurance, retirement accounts, and payable-on-death or transfer-on-death accounts. A big mistake is not keeping those beneficiary forms up to date or, worse, naming your estate as the beneficiary by default. If you don’t name a beneficiary (or if your primary beneficiary predeceases you and you forgot to name a contingent), then at your death those assets might be paid into your estate by default. That means they could become subject to probate and, relevant here, included in your taxable estate. For example, an insurance policy that should have gone directly to your child (and bypassed the estate) might end up paying to your estate if the beneficiary was not correctly set. That could unnecessarily increase your estate tax. Always review your beneficiary designations: ensure you have living primary and secondary beneficiaries named on all life insurance policies, annuities, bank and investment accounts that have TOD/POD features, etc. Keeping these outside of your estate can also reduce probate costs and complexities. The general rule: name individuals (or charities or trusts) as beneficiaries, not your estate. This way, those assets won’t count in your estate for tax purposes.

3. Owning Life Insurance Personally: As mentioned earlier, if you own a life insurance policy on yourself, the death benefit is part of your taxable estate (if you have any control or ownership incidents). Many people don’t realize this, thinking life insurance is tax-free. It’s income tax-free to the beneficiary, yes, but not necessarily estate tax-free if you owned the policy. A classic mistake is a wealthy person having a large insurance policy intended to pay estate taxes or provide for the family, but because they owned it, it just adds fuel to the estate tax fire. The solution is usually to transfer the policy to an Irrevocable Life Insurance Trust (ILIT) or otherwise get it out of your name (making sure to survive three years from the transfer, due to IRS look-back rules). If you have significant life insurance and a potentially taxable estate, not using an ILIT is a mistake. It’s relatively easy to set up and ensures the insurance payout won’t be taxed in your estate, while still providing cash to your heirs (often the very cash needed to pay the IRS on your other assets).

4. Ignoring the Upcoming Exemption Drop: Many families structured their plans under the current high exemptions and assume they’re in the clear. But with the exemption dropping in 2026, a plan that was fine today might cause a tax tomorrow. A common oversight is not revisiting old formula clauses in wills or trusts. For example, older wills might say “I leave the amount equal to my estate tax exemption to a trust for my kids and the rest to my spouse.” When the exemption was $13M, that trust would get $13M and possibly leave nothing for the spouse – which might not be the intention once the exemption plunges. Conversely, if someone thought they were under the exemption and haven’t considered that it will shrink, their estate could unexpectedly owe tax. The mistake is complacency. It’s important to stay updated on tax law changes. Try to build flexibility into your plan (disclaimers, powers of appointment, etc.) or be prepared to update documents when laws change. Right now, estate planners are urging clients to use the high exemption before it’s gone. If you wait until after it drops, you can’t retroactively use the higher amount. This “use it or lose it” aspect means 2025 is a crucial year to consider large gifts or other transfers if your estate might face tax under the lower limits.

5. Lack of Liquidity to Pay Taxes: If you do end up with an estate tax bill, your heirs will need to pay it (typically within nine months of death). A mistake is not planning for how they’ll get the cash to do so. If your wealth is tied up in illiquid assets like real estate or a closely-held business, your estate might have to sell something quickly (perhaps at a fire-sale price) to raise funds for the IRS. This can be very destructive to the estate’s value and your intended plan (imagine having to sell the family business or a property that’s been in the family just to pay taxes). To avoid this, either work to reduce the taxable estate (so no tax is due) or ensure there is liquidity. Life insurance is one way to provide liquidity (again, ideally held in an ILIT so it’s outside the estate). Another way is to gradually diversify assets or set aside funds in a “sinking fund” to cover taxes. Executors can also elect to pay estate tax in installments under certain conditions (for business assets), but interest will apply. The bottom line: don’t leave your heirs land rich but cash poor when a tax bill comes due. Thinking ahead about liquidity is key.

6. Overlooking Portability or Trust Options for Spouses: If you’re married, a big mistake is assuming everything is fine because “I’ll just leave everything to my spouse, and then they’ll handle it.” While the unlimited marital deduction makes it possible to leave all assets to a spouse tax-free, this can waste the first spouse’s own exemption if portability is not elected. Some couples still use bypass trusts (credit shelter trusts) to ensure the first exemption is used. Others rely on portability. The mistake is not doing either – for instance, leaving it all outright to the spouse and then not filing an estate tax return to secure the DSUE (Deceased Spouse’s Unused Exemption). That could result in the surviving spouse’s estate being needlessly taxed on amounts that could have been shielded. On the flip side, some people blindly use outdated trust formulas that end up over-funding a bypass trust (due to the large exemption) which can cause other issues (like losing step-up at second death or straining the spouse’s access to funds). The fix is to make a conscious plan for the two exemptions: either use a trust or use portability (or a mix of both). Don’t just default without thinking it through, or you could lose a chance to shelter millions of dollars from tax.

7. Assuming “No Estate Tax in California, so no worries”: We’ve touched on this, but a mistake for Californians is to be lulled into complacency by the lack of a state estate tax. Yes, California imposes no estate tax, but federal law still applies. People in other states might be more attuned to estate taxes because their state has one with a lower threshold (like in Oregon or New York, a $5 million estate can trigger state estate tax). In California, you might know folks with $10 or $15 million estates who paid nothing in estate tax when they died in recent years – that’s because of the temporary high federal exemption. Don’t assume that will continue. High home values, large IRAs/401(k)s, and other assets mean many Californians have amassed significant estates. If your estate including life insurance and retirement plans is, say, $8 million, you would pay $0 estate tax if you died in 2025, but you might owe over $400,000 if you die in 2026 or later (roughly $1 million over exemption taxed at 40%). The difference is purely timing and law change. So the mistake is not recognizing that the landscape is shifting and failing to adjust. Californians should evaluate their net worth and projections of growth – the house that’s $2M today might be $3M in a few years; add investment growth, and an estate can grow faster than one might expect. Plan with future values and law changes in mind, not just today’s snapshot.

8. Not Seeking Professional Advice for Complex Situations: Lastly, estate tax planning can get complicated. DIY wills or internet advice might not be enough if you have a sizable or complex estate. Mistakes often occur because someone didn’t fully understand a technique or the fine print. For example, setting up a trust but not actually transferring assets into it (a funded trust is useless for tax purposes if assets never retitled into it), or mis-titling assets between spouses, or forgetting to file a needed tax form. Working with experienced estate planning attorneys and tax advisors is important when your estate is potentially taxable. They keep up with the latest laws and can tailor strategies to your situation. Inadvertent mistakes, like retaining too much control over an irrevocable trust (which could pull it back into your estate), can defeat the purpose if not structured properly. So, the takeaway is: get good advice, and review your plan periodically.

Avoiding these common missteps will help ensure that your estate plan actually achieves the goal of minimizing taxes and smoothly transferring your wealth as you intend. Now, let’s focus specifically on considerations for California residents.

Special Considerations for Californians

For individuals and families in California, estate planning has a few particular angles to keep in mind:

No State Estate Tax (For Now): As reiterated, California does not have its own estate tax. This means you only have to plan around the federal estate tax. This is a relief in one sense, but don’t let it make you ignore the issue. The absence of state tax just means one less layer of tax to plan for. Keep an eye on state legislation, though – while nothing is on the horizon at the moment, tax laws can change. But today, your focus is federal.

High Property Values: California’s real estate is among the most expensive in the nation. A primary residence that was purchased decades ago for a modest sum might now be worth millions. Many longtime California homeowners are “asset millionaires” just because of home equity. When the federal exemption drops to around $7 million per person, a home could make up a huge chunk of that. For example, a couple with a house worth $4 million and other assets of $4 million would be over the $7M per person limit (together they have $8M each if split evenly). High property values mean you must include realistic current market values of your real estate in your estate projections. It also makes strategies like the Qualified Personal Residence Trust (QPRT) more attractive, as discussed, to remove a pricey home from the estate at a discounted value. Additionally, California property owners need to consider property tax reassessment rules when transferring real estate to children. Under Prop 19 (effective Feb 2021), only a limited $1 million exclusion from reassessment exists for transfers of a primary residence to children (and only if the child keeps it as a primary residence). While not directly an estate tax issue, this means if you leave California real estate to your kids, they could face much higher property taxes unless they qualify and file for the exclusion. Some families use trusts or LLCs to try to preserve low property tax base when passing property on, but strategies there must be done carefully and are separate from estate tax planning. Just be aware: estate planning in California should account for both estate taxes and property tax implications on inherited property.

Community Property Benefits: As mentioned, California is a community property state for married couples. One major benefit of this is the double step-up in basis on community property assets at the first spouse’s death. If you hold title properly (for example, “John and Jane Doe, as community property with right of survivorship”), then when John dies, both his and Jane’s half of the property get a full step-up to market value. This is extremely beneficial for the surviving spouse who might sell the asset or just for reducing future capital gains if the asset is later sold by the heirs. To make use of this, ensure assets that are eligible are titled as community property (not as separate property or some other form) if you want that tax benefit. Also, because of portability, the surviving spouse can still use John’s unused estate exemption as well. So California couples have a powerful combination: use the marital deduction and portability to defer estate tax and double up exemptions, plus get the community property double step-up for income tax savings. This doesn’t require any special trust – it’s just how the law works in California. But proper titling and a well-drafted estate plan to capture these benefits are important.

Estate Size and Lifestyle: Californians may find that even if their estate is under the taxable threshold, it might not be far under. The cost of living and asset values here mean you might cross into taxable territory with one windfall or if asset values grow. Also, many Californians who might have lower liquid assets could have high life insurance death benefits or large retirement accounts that push the estate value up. So, do a holistic tally of your assets: home, other real estate, investments, bank accounts, retirement accounts, life insurance (if you own it), business interests, personal property (valuable art, etc.). Consider the trajectory of those assets – are you still accumulating wealth? Will your house or stocks likely be worth more in 10-15 years? Factor in those growth expectations. A lot of people in their 50s or 60s in California today could have estates that exceed the post-2025 exemption by their 70s or 80s. Planning early (like using today’s high exemption) could save a lot of tax later.

State Income Taxes and Trusts: One more California-specific consideration: if you establish certain types of trusts, California might tax the trust income. California has high income tax rates (up to 13.3% for individuals). A properly structured irrevocable trust might not be subject to CA tax if administered out of state with out-of-state trustees and beneficiaries, etc. Some high-net-worth Californians actually move some wealth into trusts that are not considered CA resident trusts to avoid ongoing CA income tax on the trust investments. This is more of an income tax play than estate tax, but it intersects – for example, a trust that saves estate tax might inadvertently create a CA income tax issue if not planned for. If you’re doing a dynasty trust and your kids stay in California, that trust might pay CA tax on its income. There are strategies to minimize that (like making beneficiaries the taxpayers on trust income via distribution, or situsing the trust elsewhere). Just something to be aware of: talk to your advisor about state income tax on any trust you set up.

In essence, Californians should do all the standard estate tax planning, but be extra mindful of property issues and the high value of assets here. The good news is that California’s community property system and lack of estate tax offer some advantages that you can leverage (double step-up, no state tax bite). By combining those with the federal strategies discussed, you can craft a plan that fits the California context.

Conclusion

Minimizing estate taxes through estate planning comes down to understanding the rules and taking proactive steps. We’ve covered what estate taxes are and when they apply – primarily at the federal level for estates above certain thresholds, with no California estate tax in effect. We discussed how current laws give a large exemption (about $14 million in 2025), but that this is temporary and expected to drop around 2026, potentially exposing more Californians to estate tax. The silver lining is that there are many strategies to reduce estate tax exposure:

• Taking full advantage of exemptions, the annual gift exclusion, and the unlimited marital deduction.

• Using lifetime gifting to shrink your estate, including charitable gifts for dual benefit.

• Establishing irrevocable trusts (like ILITs, GRATs, QPRTs, and others) to remove assets from the estate while benefiting your heirs.

• Utilizing family limited partnerships (FLPs) or LLCs to enable valuation discounts, allowing you to transfer wealth at a lower tax cost.

• Leveraging spousal portability so married couples don’t waste any of their combined exemption.

• Being mindful of the step-up in basis – using it to your advantage to save on capital gains tax, and balancing that against estate tax tactics.

• And avoiding pitfalls like not updating beneficiaries, owning insurance in your name, or neglecting to plan for the coming changes in the law.

Estate planning is highly individual – the right mix of strategies depends on your family situation, the types of assets you have, your values (e.g., charitable intentions), and your long-term goals. What’s universal, though, is the need for planning. By thinking ahead, you can preserve your wealth, take care of your loved ones, and direct your legacy as you intend, rather than leaving it to rigid tax rules. And importantly for Californians, planning can ensure that the great wealth that a high property value or a successful business represents passes on rather than being eroded by taxes.

Remember that estate planning is not a one-and-done task. Laws change (as we expect in 2026), asset values change, and families evolve (births, deaths, marriages, divorces). It’s wise to review your estate plan every few years or when major life events occur. Work with qualified professionals who stay current on federal and state law changes. By staying informed and proactive, you can minimize not only estate taxes but also the stress and confusion for your heirs. The result will be a smoother transfer of assets and more of your hard-earned wealth going to the people and causes you care about, rather than to the government.

Ultimately, smart estate planning is about peace of mind – knowing that you have taken the necessary steps to protect your legacy from unnecessary taxation and that your family will be provided for according to your wishes. With the strategies outlined here and proper guidance, you can achieve that peace of mind while minimizing the tax bite on your estate. Your future heirs will thank you for your foresight. (findlaw.com)