Estate tax is often misunderstood, and those misconceptions can lead to significant, unexpected expenses. Without proper planning, what you have worked hard to build could be significantly reduced before it ever reaches your heirs. In this article, we will explain the basics of how the estate tax works and debunk a few common myths about reducing estate taxes.
How Does Estate Tax Work?
Both federal and state estate taxes may apply depending on where a person lives and how much their estate is worth. For 2025, the federal estate tax exemption is $13.99 million, meaning that if you pass away, your estate will only incur this tax if it is valued above $13.99 million. When the westate tax applies, only the amount above this threshold will be taxed.
State estate taxes usually have lower exemption limits, which can catch some people off guard. For example, Massachusetts currently has an estate tax exemption of $2 million. Thus, even if an estate is not federally taxable, it may still be taxable at the state level. Other states have their own rules and exemption amounts, so it is important to know what applies where you live.
Finally, the responsibility to file estate tax returns and pay any due taxes falls to the executor or administrator of the estate. They must ensure all tax obligations are met before distributing assets to heirs or beneficiaries. Failure to comply can result in penalties and interest, further reducing the inheritance your family receives.
Common Estate Tax Myths
My Estate Is Too Small to Owe Estate Taxes
People often underestimate the value of their estate and assume that they are well below the estate tax exemption. However, it is important to remember that the value of an estate goes beyond just what you hold in your bank, retirement, and investment accounts. It also includes things such as the value of your home, a prized collection of jewelry or other items, your vehicles, and various other assets. These figures quickly add up, especially for those who own businesses or multiple homes.
I Already Have a Will, So I Don’t Need to Worry About Reducing My Estate Tax
There is no question that your will is a vital document, but it is a common misconception that a will covers all of your estate planning needs. In reality, a will does not do anything to mitigate taxes; it simply lays out how you wish your assets to be distributed after your death. Reducing estate tax requires separate planning strategies which all fall outside the scope of a basic will.
Gifting to Others Is All I Need to Do to Reduce My Estate Tax
This is another common myth often assumed because there is some validity to it. Gifting to your heirs and others during your lifetime can be a valid strategy for minimizing taxes owed by your estate later. However, there are nuances to this process, particularly when it comes to how much you can gift. In 2025, for example, you can gift an individual up to $19,000 tax-free. Gifts above this amount will count toward your lifetime exemption, which means they will reduce the amount of your estate that can pass tax-free.
Transferring Everything to My Spouse Solves the Estate Tax Problem
Spousal transfers, whether during life or at death, are not subject to estate or gift taxes thanks to what is known as the “unlimited marital deduction.” However, this does not equate to a “free pass” for married couples; instead, it merely defers the tax. When the surviving spouse passes away, their entire estate may become taxable if it exceeds the exemption limit. Although portability allows a surviving spouse to use any unused portion of their late spouse’s federal exemption, it isn’t automatic, and you still need to plan ahead to make sure it applies.
There Is Not Much I Can Do to Avoid Estate Taxes
Numerous potential strategies exist to help mitigate estate taxes. As previously mentioned, gifting is just one of the more well-known options. Other strategies may include the use of charitable contributions and trusts, all formulated prior to death to reduce your taxable estate. A comprehensive plan can help you minimize much of the loss your estate could face while still meeting your long-term objectives.
Planning Now Can Save Millions Later
Ultimately, estate taxes will impact many people at both the federal and state levels, especially in areas like Massachusetts, where the value of a taxable estate is relatively low at just $2 million. However, with a comprehensive review of your estate plan now, long before you are unable to make decisions, it is possible to preserve your wealth by minimizing the payment of unnecessary taxes.
You worked hard for the wealth you built. With numerous strategies available to reduce what you owe to the government, you can preserve that value longer. If you do not have a plan in place, it is time to speak to an estate tax planning attorney.
