To help your kids avoid inheritance tax, use strategies like annual gifting (up to $19,000 per person in 2025) to reduce your taxable estate, setting up an irrevocable trust to hold assets outside your estate, purchasing life insurance via an Irrevocable Life Insurance Trust (ILIT) to provide tax-free funds, or converting retirement accounts to Roth IRAs/401(k)s, which heirs inherit tax-free; consult a professional for personalized planning, especially regarding state-specific taxes.
Children generally inherit significant amounts tax-free due to the high federal estate tax exemption, which is $13.99 million per individual for 2025, with a planned reversion to a lower amount ($5 million adjusted for inflation) in 2026, meaning very large estates are taxed, but most inheritances fall below this threshold, though some states have their own inheritance taxes. Heirs also benefit from the "step-up in basis," which lowers capital gains tax on inherited assets like stocks and real estate.
To transfer property to children while minimizing taxes, consider estate planning tools like trusts or gifting strategies. Consult a qualified estate attorney to explore options such as lifetime gifts within tax exemption limits or establishing a trust to manage assets.
Give more money away
Lifetime gifting is a straightforward way to begin reducing your IHT bill. By gifting money during lifetime, that would have been part of an inheritance anyway, you reduce the size of your estate so that there is smaller amount subject to IHT on your death.
There are several ways to transfer property to a child tax-free, including leaving it in a will, gifting it using lifetime and annual exclusions, selling it, or placing it in an irrevocable trust.
Transfer assets into a trust
Because those assets don't legally belong to the person who set up the trust, they aren't subject to estate or inheritance taxes when that person passes away. Setting up a trust also has other financial benefits, such as helping the estate avoid probate.
The simplest way of avoiding Inheritance Tax is via the spouse or civil partner exemption rule. This covers couples who are either legally married or in a civil partnership.
Yes, you can give your son $100,000 tax-free in 2025 by utilizing the annual gift tax exclusion and your lifetime exemption, but you'll need to report the gift to the IRS on Form 709 since it exceeds the $19,000 annual limit, though you won't pay tax unless you exceed your much larger $13.99 million lifetime gift/estate tax exemption. The gift is considered yours (the giver) for tax purposes, not your son's.
Another key difference: While there is no federal inheritance tax, there is a federal estate tax. The federal estate tax ranges from 18% to 40% and generally only applies to assets over $13.99 million in 2025 or $15 million in 2026.
Although there is no way to completely eliminate the estate tax through the use of a trust, a properly drafted trust instrument, coupled with knowledgeable estate planning, can help to reduce the estate tax burden.
Wealthy parents or benefactors of the family keep the original appreciated assets until their death, leaving those assets to an heir. Neither the current federal or local tax code require the original asset holders or the heir to pay taxes on the growth in value up to that point.
Charity exemption
Like the spousal exemption, assets passing to charity on death are exempt from inheritance tax. As such, if an entire estate passes to charity, there will be no inheritance tax due.
If you die within seven years then the value of the gift is added back into your estate, but taper relief might reduce the rate of tax on it if at least three whole years have passed.
Generally, from a tax perspective, it is more advantageous to inherit a home rather than receive it as a gift before the owner's death.
You don't have to report gifts to the IRS unless the amount exceeds $19,000 in 2025. Any gifts exceeding $19,000 in a year must be reported and contribute to your lifetime exclusion amount. You can gift up to $13.99 million over your lifetime without paying a gift tax on it (as of 2025).