Estate planning is not only about deciding who receives assets at death. For high-net-worth individuals, business owners, investors, and families with appreciating assets, a well-designed estate plan can also reduce estate tax, gift tax, generation-skipping transfer tax, income tax, and capital gains tax exposure.

The right strategy depends on the size of the estate, the type of assets involved, family goals, charitable intent, liquidity needs, and applicable federal and state tax laws. In the Washington, D.C. metropolitan area, state-level planning is especially important because both Maryland and the District of Columbia impose their own estate taxes, which can apply even when no federal estate tax is due. Below are several commonly used estate, gift, and capital-gains planning strategies.

Lifetime Gifting

One of the most direct ways to reduce estate tax exposure is to transfer assets during life. Lifetime gifting can remove assets from the taxable estate and, perhaps more importantly, shift future appreciation to children, grandchildren, trusts, or other beneficiaries.

Common gifting techniques include annual exclusion gifts, use of the lifetime gift and estate tax exemption, gifts of fractional interests in closely held businesses, and direct payments of tuition or medical expenses. For families with significant wealth, lifetime gifting can be particularly effective when assets are expected to appreciate substantially after the transfer.

Irrevocable Trust Planning

Irrevocable trusts are central to many advanced estate tax plans. When properly structured, these trusts can remove assets from the grantor’s taxable estate while preserving control over how and when beneficiaries receive the assets. Common irrevocable trust strategies include:

• Irrevocable Life Insurance Trusts, or ILITs. An ILIT can own life insurance outside of the insured’s taxable estate. This may allow policy proceeds to be available for estate tax liquidity, family support, or business succession without increasing the estate tax burden.
• Spousal Lifetime Access Trusts, or SLATs. A SLAT allows one spouse to make a completed gift to an irrevocable trust for the benefit of the other spouse and, often, descendants. If properly designed, the transferred assets and future appreciation may be excluded from the grantor’s estate, while the beneficiary spouse may retain access to trust distributions.
• Intentionally Defective Grantor Trusts, or IDGTs. An IDGT is designed so that the trust assets are generally outside the grantor’s estate for estate tax purposes, while the grantor remains responsible for income taxes on the trust’s income. That income-tax feature can be powerful: by paying the tax personally, the grantor allows the trust assets to grow without being reduced by income tax payments, effectively making additional tax-free transfers to beneficiaries.
• Dynasty Trusts. For families interested in multigenerational wealth planning, dynasty trusts may help preserve assets for children, grandchildren, and more remote descendants while using generation-skipping transfer tax exemption. These trusts can also provide creditor protection, divorce protection, and long-term governance over family wealth.

Grantor Retained Annuity Trusts

A Grantor Retained Annuity Trust, or GRAT, can be useful for transferring appreciation to beneficiaries with limited gift tax cost. The grantor transfers assets to a trust and retains an annuity payment for a fixed term. If the assets outperform the IRS assumed rate, the excess appreciation may pass to beneficiaries with little or no additional gift tax.

GRATs are often considered for marketable securities, business interests, or other assets expected to appreciate significantly over a defined period.

Family Limited Partnerships and LLCs

Family limited partnerships and family LLCs can help consolidate management of family assets, facilitate gifting, and support business succession planning. In appropriate cases, gifts of minority or non-controlling interests may be eligible for valuation discounts, depending on the structure, facts, and applicable law.

These entities must be created and administered carefully. They should have real business or investment purposes, proper governance, separate records, and meaningful non-tax objectives.

Charitable Planning and Charitable Remainder Trusts

Charitable planning can reduce tax exposure while supporting philanthropic goals. A Charitable Remainder Trust, or CRT, can be especially useful for clients holding highly appreciated assets.

With a CRT, a client transfers appreciated property to an irrevocable charitable trust. The trust can sell the asset without immediate recognition of capital gains at the trust level, reinvest the proceeds, and provide an income stream to the client or other non-charitable beneficiaries for a term of years or life. At the end of the trust term, the remaining assets pass to charity.

CRTs can be helpful for clients who want to diversify a concentrated position, generate income, defer or spread out capital gains recognition, obtain a potential charitable income tax deduction, and make a meaningful charitable gift.

Qualified Small Business Stock and QSBS “Stacking”

For founders, early investors, and entrepreneurs, Qualified Small Business Stock, or QSBS, can offer substantial capital-gains tax benefits under Internal Revenue Code Section 1202. In general, qualifying non-corporate taxpayers may be able to exclude gain from the sale of QSBS if the statutory requirements are satisfied, including original issuance, active business, gross asset, eligible corporation, and holding-period requirements. Section 1202 allows eligible taxpayers to exclude gain subject to statutory limits, generally the greater of $10 million or 10 times the taxpayer’s basis in the stock, depending on the facts.

In the estate planning context, QSBS can be coordinated with irrevocable trust planning. One strategy sometimes referred to as QSBS stacking involves transferring QSBS to separate non-grantor trusts or other eligible taxpayers so that each taxpayer may potentially have a separate Section 1202 exclusion. This planning is highly technical and must be handled carefully. The trust must be respected as a separate taxpayer, the transfer must not violate Section 1202 requirements, and the overall plan must account for income tax, gift tax, estate tax, fiduciary income tax, state tax, and anti-abuse considerations.

When available, QSBS planning may be one of the most powerful capital-gains planning tools for business owners and investors. However, eligibility should be reviewed early, ideally before a sale, merger, redemption, recapitalization, or other transaction.

Sales to Intentionally Defective Grantor Trusts

In addition to making gifts to an IDGT, a client may sell appreciating assets to an IDGT in exchange for a promissory note. If properly structured, the sale may not trigger income tax because the trust is treated as owned by the grantor for income tax purposes. Future appreciation above the note payments may accumulate outside the grantor’s taxable estate.

This technique is often considered for closely held business interests, real estate, or other appreciating assets. It requires careful valuation, adequate seed funding, commercially reasonable note terms, and proper administration.

Estate Freezes and Business Succession Planning

For business owners, estate tax planning often overlaps with succession planning. Techniques such as recapitalizations, voting and non-voting interests, buy-sell agreements, gifts, or sales of minority interests, GRATs, and IDGTs can help shift future appreciation while preserving operational control.

A strong business succession plan should address not only tax efficiency, but also governance, liquidity, management transition, family participation, and dispute prevention.

Portability and Credit Shelter Trust Planning

Married couples should also consider how to use both spouses’ estate tax exemptions. Portability may allow a surviving spouse to use a deceased spouse’s unused federal estate tax exemption if a timely federal estate tax return is filed. However, portability does not solve every problem. It may not apply to state estate tax exemptions, does not preserve the deceased spouse’s generation-skipping transfer tax exemption, and does not provide the same creditor, remarriage, appreciation-shifting, or asset-management benefits as trust planning.

For that reason, credit shelter trusts, bypass trusts, and disclaimer-based planning may still be valuable, particularly for clients in Maryland, D.C., or other jurisdictions with separate estate tax regimes.

State Estate Tax Planning in Maryland and D.C.

State estate tax planning should not be overlooked. Maryland and D.C. each have estate tax systems separate from the federal estate tax. Maryland also has an inheritance tax, although many close family members are exempt. Because state exemptions may be lower than the federal exemption, a client may face state estate tax even if the estate is far below the federal taxable threshold.

Planning may include lifetime gifting, marital trust planning, credit shelter trusts, charitable gifts, domicile planning, liquidity planning, and careful review of real property or business interests located in multiple jurisdictions.

Choosing the Right Strategy

No single tax strategy is right for every client. The most effective estate plan often combines several techniques, such as lifetime gifting, irrevocable trusts, charitable planning, business succession structures, and capital-gains planning. The best approach depends on the client’s balance sheet, family circumstances, cash-flow needs, risk tolerance, charitable goals, and desire for control.

Because these strategies involve complex tax rules and long-term consequences, clients should consult experienced estate planning counsel, tax advisors, valuation professionals, and financial advisors before implementing a plan.

A well-designed estate plan can do more than reduce taxes. It can preserve family wealth, protect beneficiaries, provide liquidity, reduce conflict, support charitable goals, and create a thoughtful structure for transferring assets to the next generation.

If you have questions on estate planning tax saving strategies or other estate plan matters, please reach out to Justin Banford at (703) 284-7253 or jbanford@beankinney.com.

This article is for general informational purposes only and does not contain or convey legal or tax advice. Consult a lawyer or tax professional for advice specific to your situation. Any views or opinions expressed herein are those of the authors and are not necessarily the views of any client.