Your estate planning attorney can help you legally minimize tax liabilities to your heirs by gifting assets during your lifetime, establishing trusts, and leveraging exemptions. Tax-advantaged accounts, capital gains tax planning, and other tax-efficient investments like life insurance can minimize taxes to your heirs.
For example, IRS rules on gifting money to family in 2024 stipulate that you can gift up to $18,000 to any one person over the course of the year without having to report the gift to the IRS. This is called the gift tax exclusion, and the amount is subject to change every year.
Transfer assets into a trust
Certain types of trusts can help avoid estate taxes. An irrevocable trust transfers asset ownership from the original owner to the trust, with assets eventually distributed to the beneficiaries.
There are 2 primary methods of transferring wealth, either gifting during lifetime or leaving an inheritance at death. Individuals may transfer up to $13.99 million (as of 2025) during their lifetime or at death without incurring any federal gift or estate taxes. This is referred to as your lifetime exemption.
Inheritance checks are generally not reported to the IRS unless they involve cash or cash equivalents exceeding $10,000. Banks and financial institutions are required to report such transactions using Form 8300. Most inheritances are paid by regular check, wire transfer, or other means that don't qualify for reporting.
One good way is to leave the inheritance in a trust. The trust can be set up with some provisions, such as making distributions over time. A trust can also remove the issue of probate, allowing the inheritance to pass without issue.
Estate Tax Thresholds
You can inherit up to $12.92 million in 2023 without paying federal estate taxes due to the estate tax exemption. However, some states have their own inheritance taxes, so you may still owe taxes to your state. Any estate exceeding the above thresholds could be taxed up to 40%.
Bottom Line. California doesn't enforce a gift tax, but you may owe a federal one. However, you can give up to $19,000 in cash or property during the 2025 tax year and up to $18,000 in the 2024 tax year without triggering a gift tax return.
By setting up an irrevocable trust, donors can direct how they want the money to be managed and specify how it can be distributed and when it should be withheld, even if that happens after the donor's death.
For 2021, you can forgive up to $15,000 per borrower ($30,000 if your spouse joins in the gift) without paying gift taxes or using any of your lifetime exemption. (These amounts are the same as in 2020.) But you will still have interest income in the year of forgiveness. Forgive (don't forget).
If you received a gift or inheritance, do not include it in your income. However, if the gift or inheritance later produces income, you will need to pay tax on that income.
The primary way the IRS becomes aware of gifts is when you report them on form 709. You are required to report gifts to an individual over $17,000 on this form. This is how the IRS will generally become aware of a gift. However, form 709 is not the only way the IRS will know about a gift.
If you're still a dependent of your parents and they're paying for your higher education--room and board for example--this isn't considered a gift. A transfer of $100,000 to you directly is considered a gift and may be taxable to the giver.
Trusts are most commonly used to pass on an estate to children, in which case a revocable trust is ideal. If you have a large amount of wealth that you want to pass on to your children, consult your financial planner about setting up a trust that can automatically be passed on to your heirs after your demise.
The best way to avoid the inheritance tax is to manage assets before death. To eliminate or limit the amount of inheritance tax beneficiaries might have to pay, consider: Giving away some of your assets to potential beneficiaries before death. Each year, you can gift a certain amount to each person tax-free.
Deposit the money into a safe account
Your first action to take when receiving a lump sum is to deposit the money into an FDIC-insured bank account. This will allow for safekeeping while you consider how to make the best use of your inheritance.
In general, any inheritance you receive does not need to be reported to the IRS. You typically don't need to report inheritance money to the IRS because inheritances aren't considered taxable income by the federal government. That said, earnings made off of the inheritance may need to be reported.
Strategies to transfer wealth without a heavy tax burden include creating an irrevocable trust, engaging in annual gifting, forming a family limited partnership, or forming a generation-skipping transfer trust.