4 Ways to Help Avoid the Taxman in Passing on Generational Wealth

The exemption from federal estate and lifetime gift taxes will be cut in half in 2026. To protect their estate, high-net-worth individuals and families can act now to take advantage of the tax exemption while they can.

On January 1, 2026, the lifetime estate and gift tax exemption thresholds will be cut in half, falling to about $6 million to $7 million for individuals and $12 million to $14 million for couples.1 Estate assets above those limits are subject to taxes at a rate of up to 40%.

For example, an heir to an estate worth $12 million will inherit less due to the potential tax liability of $2 million to $2.4 million imposed on the estate of the deceased. The potential erosion of assets is causing high-net-worth individuals to re-examine their gifting strategies before the changes take effect.

Here are four ways to relieve the increased tax burden stemming from the changes:

1. Use annual exclusion gifts: Individuals can make $18,000 annual exclusion gifts to as many people as they desire, shielding that money and any future appreciation from taxes in parental estates. Using 529 savings plans, individuals can frontload up to five years of annual $18,000 gifts at once without incurring gift tax. In doing so for a dozen beneficiaries, individuals could potentially reduce their own taxable estate as much as $1 million or more.2
2. Set up an ILIT: Irrevocable life insurance trusts (ILITs) can buy life insurance policies to finance the estate tax bill. The ILIT uses the life insurance proceeds to purchase assets from the estate, financing the tax bill.3 This strategy is particularly helpful to business owners intending to pass their business to the next generation.
3. Spousal lifetime access trusts (SLATs): Married couples can use spousal lifetime access trusts to pass certain assets to their spouses. One or both spouses can set up a SLAT for the benefit of the other spouse, their children or both. Property shared by a donor and a non-donor spouse should not be used to fund SLATs. If both spouses set up a SLAT, it’s important that each is slightly different to avoid the reciprocal trust doctrine, which would result in the imposition of estate taxes on the assets of both SLATs.4
4. FLPs or LLCs: Vehicles such as family limited partnerships (FLPs) and family limited liability corporations (LLCs) can help reduce inheritance taxes. Once established, the parents can make discounted gifts of interests in the entities to the next generation, thus not using as much of the allowable annual and lifetime gift exclusions.