Introduction: What Is the "Death Tax"?

The term "death tax" might sound dramatic, but it's just another name for estate taxes—federal and sometimes state taxes imposed on the assets you leave behind when you pass away. While not everyone is subject to these taxes, for those with significant wealth, they can take a substantial bite out of the inheritance meant for their loved ones.

Estate taxes have long been a controversial topic. Some argue they prevent dynastic wealth and redistribute resources fairly, while others see them as an unfair government grab of wealth that has already been taxed during one's lifetime. Regardless of where you stand, if you have an estate that might be affected, knowing how to minimize your tax liability legally is crucial.

This guide will walk you through effective estate tax reduction strategies that keep you fully compliant with the law while maximizing the wealth you pass on to your heirs.

How Estate Taxes Work

Who Pays Estate Taxes?

The federal government imposes estate taxes on estates exceeding a specific threshold. In 2025, the federal estate tax exemption is approximately $13.99 million per individual (double for married couples, totaling $27.98 million). Any amount above this threshold is taxed at a progressive rate, with a top rate of 40%.

Some states also impose their own estate or inheritance taxes, often with lower exemption limits. This makes planning even more critical if you live in a state like New York, Massachusetts, or Oregon, where estate taxes apply at a lower threshold.

Special Consideration for Non-Citizen Spouses

Why Citizenship Matters in Estate Planning

One of the biggest estate planning pitfalls involves married couples where one spouse is a non-U.S. citizen. The unlimited marital deduction, which allows U.S. citizen spouses to inherit tax-free, does not automatically apply to non-citizen spouses. This means that without proper planning, a surviving non-citizen spouse could face a hefty estate tax bill immediately upon inheriting assets beyond the exemption limit.

Example: The Immediate Estate Tax Hit Without a QDOT

Michael, a U.S. citizen, has an estate worth $20 million and is married to Sofia, a non-U.S. citizen. If Michael passes away without proper planning, Sofia can only receive $13.99 million tax-free, and the remaining $6.01 million is subject to immediate estate taxes at 40%, meaning a tax bill of $2.4 million—due right away. This can create a liquidity crisis if most of the estate consists of real estate or investments that are not easily sold.

How a QDOT Saves the Day

A Qualified Domestic Trust (QDOT) is a tool that defers estate taxes for a non-citizen spouse by placing assets into a trust instead of transferring them outright. The trust holds assets for the benefit of the surviving spouse, and estate taxes are only due when distributions of principal are made or upon the surviving spouse's death.

Example: Using a QDOT for Tax Deferral

Now let's imagine Michael planned ahead and set up a QDOT before passing. Instead of Sofia being hit with an immediate $2.4 million tax bill, the entire $20 million estate is transferred into the trust, deferring estate taxes. Sofia can still receive income from the trust without triggering estate taxes, giving her the financial security she needs without the IRS knocking on her door right away.

What If the Non-Citizen Spouse Has a Green Card?

If the surviving spouse is a permanent resident (green card holder), they are treated like a U.S. citizen for estate tax purposes. This means they qualify for the unlimited marital deduction, and estate taxes are deferred until their passing. However, when they eventually pass, estate taxes will apply unless further planning (such as a dynasty trust or charitable strategies) is in place.

Example: Tax Deferral for a Green Card Holder

Michael still has his $20 million estate, but this time, Sofia is a green card holder. Because she qualifies for the unlimited marital deduction, she inherits the entire estate without immediate estate taxes. However, when she passes, her estate is subject to estate taxes unless additional tax planning strategies are implemented.

Annual Gifting and Lifetime Gift Tax Exemption

Using the Annual Gift Tax Exclusion

One of the easiest and most overlooked ways to reduce estate taxes is through gifting. The IRS allows individuals to gift up to $19,000 per recipient per year in 2025 without triggering gift taxes. This means you can gradually transfer wealth out of your taxable estate over time.

Example:

John and Jane, a married couple, have three children. Each parent can gift $19,000 per child per year, totaling $114,000 annually ($19,000 × 3 children × 2 parents). Over a decade, this strategy alone could remove $1.14 million from their taxable estate without using any of their lifetime gift tax exemption.

The Lifetime Gift and Estate Tax Exemption

In addition to the annual exclusion, individuals have a lifetime gift tax exemption of $13.99 million in 2025. This means that if you gift more than the annual exclusion amount, you can still avoid paying gift tax as long as the total amount gifted remains below your lifetime exemption.

Example:

Mary, a wealthy investor, wants to reduce her estate. She gifts $5 million to her children in a single year. Because this exceeds the $19,000 per recipient annual limit, the excess counts against her $13.99 million lifetime exemption, reducing her remaining exemption to $8.99 million.

Gifting strategies are particularly useful for reducing future estate tax liability, as any assets removed from the estate not only escape future estate taxes but also remove any future appreciation from the taxable estate.

Advanced Estate Planning Strategies

Installment Notes and Intentionally Defective Grantor Trusts (IDGTs)

An Installment Sale to an Intentionally Defective Grantor Trust (IDGT) is a powerful tool for transferring wealth while minimizing estate taxes. The IDGT allows assets to grow outside of the grantor's taxable estate while deferring capital gains tax.

Example:

Michael sells a business worth $10 million to an IDGT in exchange for a promissory note at a low interest rate (set by the IRS). The assets inside the IDGT continue to appreciate, but Michael is not taxed on the growth since he is still considered the owner for income tax purposes. Over time, the trust pays down the promissory note using business income, allowing assets to pass tax-efficiently to heirs.

Private Placement Life Insurance (PPLI) and Foreign Grantor Trusts (FGTs)

For ultra-high-net-worth individuals, Private Placement Life Insurance (PPLI) and Foreign Grantor Trusts (FGTs) in offshore jurisdictions such as Bermuda and Barbados can provide exceptional tax advantages.

• PPLI: A specialized life insurance policy that allows tax-free investment growth and distributions. By holding assets inside a PPLI policy, individuals can defer or eliminate capital gains taxes and reduce estate taxes.
• Foreign Grantor Trusts (FGTs): Established in tax-favorable jurisdictions, an FGT allows assets to grow tax-free while offering asset protection from creditors and estate taxation.

Conclusion

Estate planning is complex, but with the right strategies, you can minimize taxes and maximize the legacy you leave behind. Consulting with an experienced estate planning attorney ensures you make the most of available tools and avoid costly mistakes.

Contact The Law Offices of James Burns

If you need help structuring your estate plan to minimize taxes, contact The Law Offices of James Burns at (949) 305-8642 or visit www.jamesburnslaw.com for expert legal guidance.

Additional Resources

For more insights, check out related articles on estate planning:

• Does a Living Trust Create Additional Tax Concerns?
• Understanding Different Types of Trusts
• The Law Office of James Burns' 3-Step Estate Planning System
• How Living Trusts Can Simplify Your Estate Planning Process
• Why Every Family Needs a Customized Estate Plan

For a full list of estate planning insights, visit www.jamesburnslaw.com/blog.

Disclaimer

This article is for informational purposes only and does not constitute legal advice. Estate tax laws change frequently, and individual circumstances vary. Always consult with a qualified estate planning attorney before making any decisions regarding your estate.