How to Preserve Wealth Through Estate Planning

Estate taxes primarily impact ultra-high-net-worth individuals and families seeking to preserve wealth across generations. For those with a net worth exceeding $10 million—or families with assets in the hundreds of millions or more—proactive estate planning is essential to managing tax exposure. Strategic planning can not only reduce tax liabilities but also can ensure the seamless transfer of wealth in alignment with legacy and philanthropic objectives.¹

This guide addresses key questions frequently raised by ultra-high-net-worth families, including:

• What are the most effective legal strategies for minimizing estate, inheritance, and gift taxes?
• How can wealth be transferred to heirs in a tax-efficient manner?
• What role does marital deduction play in estate tax planning?
• How do valuation discounts and trusts enhance tax efficiency?
• What advanced estate planning techniques can optimize wealth preservation?

Understanding Taxes on Wealth Transfers

A complex interplay of federal and state tax regulations governs the transfer of wealth. To ensure long-term asset preservation, it is essential to understand the nuances of estate, inheritance, gift, and capital gains taxes.

Federal Estate Tax

• The U.S. does not impose a federal inheritance tax; instead, the estate tax applies to the total value of an estate before assets are distributed to heirs. The federal estate tax exemption for 2025 is $13.61 million per individual and $27.22 million for married couples². Without legislative action, this exemption will revert to approximately $6 million per individual in 2026³. Amounts exceeding the exemption are subject to a 40% tax rate.⁴

State Estate and Inheritance Taxes

• Twelve states and the District of Columbia impose an estate tax, with varying thresholds and rates. ⁵
• Six states impose an inheritance tax, meaning beneficiaries may owe taxes based on their relationship to the decedent.⁶ Some states impose both.

Gift Tax

• The annual exclusion for gifts in 2025 is $18,000 per recipient (or $36,000 for married couples). ⁷
• The lifetime gift tax exemption matches the estate tax exemption at $99 million per individual. ²
• Direct payments for tuition and medical expenses (when made directly to the institution) do not count toward the lifetime exemption.⁸

Capital Gains Tax and the Step-Up in Basis

• Beneficiaries receive a step-up in basis upon inheritance, resetting the asset’s tax basis to its fair market value at the time of the benefactor’s death. This adjustment significantly reduces capital gains tax upon future sale.⁹

Strategies to Reduce Estate Taxes

A well-structured estate plan incorporates multiple techniques to optimize tax efficiency.

Strategic Gifting

• Annual exclusion gifts allow for tax-free transfers of up to $18,000 per recipient in 2025. ⁷
• Lifetime gifts leverage the unified estate and gift tax exemption of $13.61 million. ²
• Direct tuition and medical payments offer additional tax-efficient transfer opportunities. ⁸

Trust Planning

• Irrevocable Life Insurance Trusts (ILITs): Exclude life insurance proceeds from the taxable estate.¹⁰
• Qualified Personal Residence Trusts (QPRTs): Transfer real estate at a reduced tax valuation while allowing continued use. ¹¹
• Spousal Lifetime Access Trusts (SLATs): Preserve assets outside the estate while providing a spouse with indirect access.¹²

Valuation Discounts and Adjustments

• Family Limited Partnerships (FLPs): Facilitate asset transfers at discounted valuations.¹³
• Special Use Valuations: Reduce estate tax exposure for qualifying real estate, such as family farms or closely held businesses.¹⁴

Charitable Giving

• Donor-Advised Funds (DAFs): Enable tax-efficient philanthropic contributions with flexibility.¹⁵
• Private Foundations: Establish a structured giving strategy while reducing estate tax liabilities.¹⁶
• Charitable Trust Structures (e.g., CLATs, CRUTs): Offer philanthropic benefits while enabling long-term wealth transfer to heirs in a tax-efficient manner.¹⁷

Estate Freeze Techniques

• Grantor Retained Annuity Trusts (GRATs): Transfer asset appreciation free of gift tax if the appreciation exceeds the IRS Section 7520 hurdle rate.¹⁸
• Intra-Family Loans and Installment Sales: Leverage low interest rates to shift wealth across generations tax-efficiently.¹⁹

Spousal and Marital Planning

• Unlimited Marital Transfers: Allow tax-free transfers between spouses (for U.S. citizens).²⁰
• Portability of Exemptions: Enables the surviving spouse to utilize any unused portion of the deceased spouse’s estate tax exemption.²¹

Asset Transfers and Advanced Strategies

• Private Annuities: Convert assets into an income stream while reducing estate tax exposure, though this strategy carries financial risks.²²
• Dynasty Trusts: Preserve wealth for multiple generations by mitigating estate tax liability over time but must comply with generation-skipping transfer (GST) tax ²³

The Importance of Proactive Estate Planning

With the scheduled sunset of the current estate tax exemption in 2026, timely planning is essential. Ultra-high-net-worth families should work closely with experienced advisors to implement tailored strategies that can preserve wealth and support long-term legacy goals. By leveraging trusts, gifting techniques, charitable strategies, and sophisticated transfer mechanisms, families can achieve tax efficiency while ensuring the continuity of their financial legacy.