Collections of federal estate and gifts taxes amount to a rounding error in the federal budget these days. According to the Monthly Treasury Statement, thus far in fiscal 2026 (which began last October 1), the IRS has collected $606 billion in income taxes, $409 billion in Social Security taxes, $90 billion in customs duties (tariffs), $82 billion in corporate income tax, and just $8 billion in estate and gift taxes. Given that the exemption from federal estate and gift taxes is permanently set this year at $15 million per taxpayer (so $30 million for married couples), this revenue source is unlikely to grow.
Still, for those who might owe a federal estate or gift tax, or a state death tax (inheritance or estate tax, varies by state), that $8 billion is real money. With careful planning, that obligation can be reduced, sometimes dramatically. There’s usually more to it than just having a will; tax strategies will most often involve making lifetime transfers. The two most important goals are freezing asset values and shifting future asset growth to beneficiaries at little to no tax cost. Here are some sample ideas:
Grantor Retained Annuity Trusts (GRATs)
The wealthy individual places assets into an irrevocable trust that will end after a specified number of years, with the remaining assets passing to a beneficiary. That will be a taxable gift. During the trust term, the grantor is paid an annuity every year. The value of this retained interest reduces the taxable value of the future gift to beneficiaries. Those are the basics.
A quarter century ago, Audrey Walton pushed this strategy to the limit. Her GRAT, funded with Walmart stock worth just over $100 million, lasted for only two years. Her annuity interest was set at 49.35% of the initial value of the trust for the first year, and 59.22% the second year. That adds up to more than 100% of the value of the trust, so the gift tax cost of the arrangement would be reduced to zero. What would be the point of this trust if the grantor is getting all the trust assets back? Any appreciation in the value of the assets during the trust term would pass to the trust remainder beneficiaries completely tax-free. As it happened, Audrey’s GRAT was exhausted by the annuity payments, the technique did not have the desired effect, but the IRS challenged her strategy anyway. Audrey won a landmark Tax Court case that legitimized the short-term zeroed-out GRAT [Walton v. Comm’r, 115 TC 589 (2000)].
We know from SEC filings that many billionaires since 2000 have used short-term GRATs to move wealth within their families. For example, according to a Bloomberg report, Sheldon Adelson placed $30.9 million of Las Vegas Sands stock in a two-year GRAT in 2011. During the trust term, the shares exploded in value, going from $2.58 per share to $46.87. Result: $518.8 million passed to his heirs free of federal gift tax when the trust ended.
Family limited partnership
For the wealthy family that hasn’t reached billionaire status, a family limited partnership offers an efficient structure for generational wealth. The asset owners are the general partners, and the family members/beneficiaries are the limited partners. The general partners make annual gifts of limited partnership shares to the beneficiaries, typically keeping the value below the amount of the annual federal gift tax exclusion ($19,000 per donee in 2026). Over time, and over a number of beneficiaries, a substantial amount of wealth may be transferred in this manner free of federal estate or gift tax.
Accurately valuing the various shares is the trickiest part of this strategy, because a variety of valuation discounts come into play, for example, for being a minority interest and lacking control of the partnership, and for the lack of marketability of the interest. On the other hand, one drawback of this plan is the absence of a basis step-up at death, so beneficiaries will have to take capital gains taxes into account.
Preferred equity interests
A closely held corporation is recapitalized to create two equity classes. The seniors receive shares that will pay annual dividends, but do not participate in future value growth.
Private annuities
Property is exchanged for a lifetime annuity. To the extent that the value of the property exceeds the actuarial value of the annuity under IRS tables, it will be a reportable gift. The transferred property will not be included in the taxable estate of the annuitant. Note that this strategy may not be used if the proposed annuitant has been diagnosed with a terminal illness.
Installment sale to a grantor trust
A grantor trust is treated as owned by the grantor for income tax purposes, but not for estate tax purposes. If the grantor sells appreciated property to a grantor trust, there is no income tax, because they are selling to themselves for income tax purposes. They can sell the property to the trust on a note, so the trust can pay for the asset over time. Any remaining value of the note will be included in the grantor’s taxable estate, and any future appreciation in asset value will accrue to the beneficiaries free of gift or estate tax. Note that this strategy also sacrifices the basis step-up at death, thereby exposing the beneficiaries to tax on capital gains.
Philanthropy
Another approach to avoiding taxes on wealth transfers is to give the wealth to charity, as there is no dollar limit on the estate or gift tax deduction for gifts to charity. There are potential income tax benefits to such strategies, but limits do apply.
Charitable remainder trust
An irrevocable transfer of assets is made to a trust that will pay a life income, either to the transferor, a designated beneficiary, or perhaps for the transferor and spouse for their joint lives. The income interest must either be a fixed dollar amount (an annuity trust) or a fixed percentage of the trust assets determined each year (a unitrust). The unitrust approach allows the income beneficiary to share in any growth in the value of trust assets, but that comes with the risk of declining payments in a down market. The annuity trust provides certainty of payment, but a period of high inflation can reduce the purchasing power of those dollars.
When the income interest ends at the passing of the beneficiary, the assets pass to a designated charity.
Charitable lead trust
A similar trust arrangement may be used with the roles reversed. Assets are placed in trust for a term of years, with trust income to be distributed annually to charity. At the end of the term, the assets return to family members. A gift tax deduction will be allowed for the actuarial value of the income interest going to charity.
Private foundations
For a major philanthropic legacy, a private foundation might be considered. According to causeiq.com there are over 150,000 private foundations in the U.S., holding more than $1 trillion in assets that generate more than $168 billion in distributable income each year.
A private foundation may be a family affair. Children of the founders may be employed by the foundation, or serve as members of the board of trustees. The whole family may be involved in determining how to distribute the foundation’s money each year.
These advanced estate planning strategies must be discussed with and supervised by experienced estate planning professionals. We recommend consulting with an Arvest Trust Officer to discuss how Arvest can help.
This content has been prepared by The Merrill Anderson Company and is intended as a general guideline.
© 2026 M.A. Co. All rights reserved.
Arvest and its associates do not provide tax or legal advice. The information presented here is not intended as, and should not be considered, tax or legal advice. Consult your tax and legal advisors accordingly.
