Top 5 Ways to Avoid Inheritance Tax on Property

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Written By kevin

A financial strategist with a knack for demystifying taxes and insurance, Kevin distills complex concepts into actionable advice.

Inheritance tax can take a significant portion of an estate’s value, leaving less for beneficiaries. Proper planning is crucial to reduce or eliminate this tax burden legally. This article outlines key strategies property owners can employ to avoid inheritance taxes and pass on more assets to heirs.

1. Lifetime Gifts

One of the most effective ways to reduce the size of your taxable estate is by gifting assets over your lifetime. The IRS allows you to give up to $17,000 per recipient each year without incurring gift tax. As the gift tax exemption amount may change over time, check the latest from the IRS website.

Gifting to your heirs annually helps reduce estate taxes. For example, gifting $17,000 each to your four grandchildren every year for 10 years removes $680,000 from your estate. The gifted assets plus any appreciation then pass tax-free.

You can also gift unlimited amounts for direct tuition and medical bill payments without gift tax. Paying these expenses for heirs reduces your reportable estate.

2. Trusts

Creating trusts transfers property ownership, reducing assets in your name and future estate taxes.

Irrevocable Life Insurance Trusts

An irrevocable life insurance trust (ILIT) owns a permanent life insurance policy on you. Upon death, proceeds pass tax-free to beneficiaries per the trust terms. Gifting money to fund premiums removes those dollars from your estate.

Qualified Personal Residence Trusts

With a qualified personal residence trust (QPRT), you transfer a personal residence into the trust while retaining the right to live there for a set term. After the term, ownership transfers to beneficiaries at a reduced gift tax value.

Charitable Remainder Trusts

Charitable remainder trusts provide income to you and/or a spouse for life, with remaining assets donated to charity at death. They offer estate tax reduction and possible income tax deductions.

3. Family Limited Partnerships

Family limited partnerships (FLPs) enable passing interests in a business to heirs at a valuation discount. FLP interests given over your lifetime or at death incur fewer taxes.

For real estate, FLPs discount property values before transfer based on lack of control and marketability. This reduces gift and estate taxes.

4. Real Estate Valuation Discounts

Hire an independent appraiser to assess property below market value based on characteristics like:

  • Fractional ownership
  • Encumbrances
  • Location restrictions
  • Physical condition

This lowers value for tax purposes upon gifting the property or inheritance. Saving 30% on a $500,000 property reduces taxes on $150,000.

5. Moving to Another State

If your assets may get subjected to state estate or inheritance taxes, consider moving to a tax-free state in retirement. For example, Florida, Nevada, Texas and others do not levy these state-level death taxes.

Review state laws yearly and understand thresholds that exempt smaller estates. Moving states to avoid taxes requires establishing legal residency.

Work With an Experienced Attorney

While this article summarizes key strategies, every situation differs. Consult an experienced estate planning attorney to employ the optimal legal approaches for avoiding inheritance taxes.

Proper planning considers your unique assets, family structure, and state laws. It also accounts for recent tax law changes. Financial and legal advice is crucial to ensure you avoid missteps.


With proper planning, you can legally minimize or eliminate inheritance taxes on property passed to heirs. This preserves more of your wealth for beneficiaries rather than the government. Strategies like lifetime gifting, trusts, valuation discounts and state residency optimization are worth exploring.

Work with a qualified team of financial advisors and estate attorneys. Start planning early to take full advantage of tax reduction strategies over time. With the right approach, you can achieve peace of mind knowing you have arranged your affairs to optimize the legacy left for loved ones.

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