The most tax-efficient way to leave money depends on how much you have and which state you live in

The federal government taxes large estates, but most people never reach the threshold. As of 2024, you can leave up to $13.61 million to your children without owing federal estate tax — and that limit resets for each person, so a married couple can leave $27.22 million. Your state may have its own, lower limit. If your estate falls below these numbers, federal tax is not your concern. The real question is whether you want to use a will, a trust, or a combination, and whether you want to give money while you are alive or after you die.

Each method has different costs, different timelines, and different outcomes for your children. A will is straightforward and cheap but goes through probate, which is public and takes months. A revocable living trust costs more upfront but keeps your affairs private and lets your children access money faster. Giving money during your lifetime can reduce your taxable estate but uses up your lifetime gift allowance. The right choice depends on your family size, how much you have, and how much control you want to keep while you are alive.

Key Takeaways

  • Federal estate tax only applies if your estate exceeds $13.61 million per person (as of 2024), but your state may have a lower threshold that affects smaller estates.
  • A revocable living trust avoids probate and keeps your estate private, but costs $1,000 to $3,000 to set up with an attorney, compared to $300 to $1,000 for a will.
  • Giving money to your children during your lifetime does not reduce federal taxes unless you exceed $13.61 million, but it does remove that money from your taxable estate if you die soon after.
  • Naming beneficiaries directly on bank accounts, investment accounts, and life insurance policies bypasses probate for those assets and costs nothing.
  • If your estate is under $13.61 million and you live in a state with no state estate tax, your main goal should be speed and privacy, not tax reduction.

Understanding federal and state estate tax thresholds

The federal estate tax threshold is $13.61 million per person in 2024. This means you can leave up to that amount to anyone — your children, a charity, or anyone else — without owing federal tax. If you are married and your spouse dies first, you can carry over their unused threshold to yours, potentially doubling it to $27.22 million. This is called portability, and it requires your executor to file a form with the IRS even if you owe no tax.

However, the federal threshold is scheduled to drop to roughly $7 million per person on January 1, 2026, unless Congress changes the law. This matters if you have a large estate and you are planning years ahead. Some people accelerate gifts or restructure their estates before 2026 to lock in the higher threshold.

Nine states have their own estate taxes with much lower thresholds. Massachusetts, for example, taxes estates over $1 million. Oregon taxes estates over $1 million. New York taxes estates over $6.94 million. If you live in one of these states and your estate exceeds the state threshold, you will owe state tax even if you are below the federal limit. Check your state's revenue department website for the current threshold and rate.

Using a will versus a revocable living trust

A will is a document that names who gets your money and who manages your estate after you die. It is straightforward to write and inexpensive — a basic will costs $300 to $1,000 if you use an attorney, or less if you use an online service. The downside is that your will must go through probate, a court process that proves the will is valid, pays your debts, and distributes your assets. Probate is public, takes three to twelve months depending on your state, and costs money in court fees and attorney fees.

A revocable living trust is a legal entity that holds your assets while you are alive. You name yourself as trustee and control everything. When you die, a successor trustee you named takes over and distributes the money to your children without going to court. A revocable living trust costs $1,000 to $3,000 to set up with an attorney, but it avoids probate, keeps your estate private, and usually distributes money to your children within weeks instead of months. The trade-off is the upfront cost and the need to transfer ownership of your assets into the trust's name.

For most people with estates under $500,000, a will is sufficient. For estates over $500,000, or if you own real estate in multiple states, a revocable living trust usually saves money and time. If you have a small estate and want to keep costs down, you can use a will and name beneficiaries directly on your bank and investment accounts, which bypasses probate for those assets.

Naming beneficiaries to avoid probate

Any account that allows you to name a beneficiary — a bank account, a brokerage account, a retirement account, or a life insurance policy — will pass directly to that person when you die, without going through probate. This is the fastest and cheapest way to leave money. You straightforward fill out a form with the financial institution, name your child as the beneficiary, and the money goes to them automatically.

Retirement accounts like 401(k)s and IRAs must have a named beneficiary by law. If you do not name one, the account goes through probate and your children may face tax complications. Life insurance policies also require a named beneficiary. Bank accounts and investment accounts do not require one, but naming one is free and saves your children months of waiting.

One caution: if you name a minor child as the direct beneficiary of a large account, the court may require a guardian to manage the money until they turn 18 or 21, depending on your state. To avoid this, you can name a trust as the beneficiary instead, or name an adult as beneficiary with instructions to hold the money for the child. Discuss this with an attorney if you have young children and significant assets.

Giving money during your lifetime

You can give money to your children while you are alive without owing any tax, as long as you stay within the annual gift tax exclusion. In 2024, you can give up to $18,000 per person per year without reporting it to the IRS. If you are married, you and your spouse can each give $18,000, for a total of $36,000 per child per year. This amount increases slightly each year with inflation.

If you give more than $18,000 in a year, you must file a gift tax return (Form 709), but you still owe no tax. Instead, the excess counts against your lifetime gift and estate tax exemption of $13.61 million. This means if you give your child $50,000 in one year, $32,000 of it uses up your lifetime exemption, leaving you with $13.578 million to leave tax-free when you die.

Giving money during your lifetime can make sense if you want to see your children benefit from it, or if you expect your estate to exceed the federal threshold. It does not reduce your taxes unless your total gifts and estate exceed $13.61 million. For most people, it is simpler to leave money in your will or trust and let your children inherit it after you die.

Strategies for larger estates

If your estate is likely to exceed $13.61 million, or if you live in a state with a lower threshold, you have options to reduce the tax your children will owe. One common strategy is an irrevocable life insurance trust, which holds a life insurance policy outside your taxable estate. The death benefit goes to your children tax-free, and the policy is not counted as part of your estate for tax purposes. This requires giving up control of the policy, so it is not right for everyone.

Another strategy is a charitable remainder trust, which lets you give money to charity while still providing income to your children during your lifetime. When the trust ends, the remaining money goes to charity. This reduces your taxable estate and may give you a tax deduction, but it is complex and only makes sense if you want to support a charity.

A spousal lifetime access trust (SLAT) lets you give money to a trust for your spouse and children while keeping it outside your taxable estate. Your spouse can access the money if needed, but it is not counted as part of your estate. This is useful for married couples with large estates, but it requires careful planning and ongoing management.

These strategies are expensive to set up and require an attorney who specializes in estate planning. They make sense only if your estate is large enough that the tax savings exceed the cost of setting them up. Talk to an estate planning attorney and a tax professional before pursuing any of these.

Updating your plan as your life changes

Your estate plan should change when your family or finances change. If you have a child, get married, divorce, or experience a major change in wealth, review your will or trust. If you named a beneficiary on an account ten years ago and your circumstances have changed, update it. Many people set up a plan and never touch it again, which can lead to unintended outcomes.

If you have a revocable living trust, you can update it yourself by amending it, which is cheaper than creating a new one. If you have a will, you can add a codicil (a short amendment) or write a new will. Either way, make sure your attorney knows about all your assets and all your children, including stepchildren if they are relevant to your wishes.

Review your plan every three to five years, or whenever something major changes. If the federal estate tax threshold drops in 2026 and your estate is close to the new limit, you may want to revisit your strategy. If your state changes its tax laws, that may affect your plan too.

Frequently Asked Questions

Do I need an attorney to set up a will or trust?

You can write a straightforward will using an online service for $100 to $300, and it will be valid in most states. However, an attorney can catch mistakes and make sure your will reflects your actual wishes. For a revocable living trust, an attorney is strongly recommended because the trust must be set up correctly and your assets must be transferred into it properly. Mistakes can be expensive to fix later.

What happens if I die without a will or trust?

Your state's intestacy laws determine who gets your money. Usually, it goes to your spouse and children in a set order. Your estate still goes through probate, and it takes longer because the court must follow state law rather than your wishes. If you have minor children, the court will appoint a guardian to manage their inheritance.

Can I leave money to my children in a way that protects it from their creditors or ex-spouses?

Yes, a trust can include restrictions that keep the money in the trust rather than giving it outright to your child. For example, you can require that the trustee hold the money and distribute it only for education, health, or emergencies. This protects the money from creditors and divorce settlements, but it also means your child does not have full control. Discuss this with an estate planning attorney if you want to add these protections.

If I give my child money now, will they have to pay taxes on it?

No. Gifts are not taxable income to the recipient. You may have to file a gift tax return if the gift exceeds $18,000 in a year, but your child owes no tax. The only time tax becomes an issue is if the gift is so large that it uses up your lifetime exemption and your estate later exceeds $13.61 million.

What is the difference between a beneficiary and an heir?

A beneficiary is someone you name to receive money from a specific account or policy. An heir is someone who receives money under your will or state law if you do not name a beneficiary. Naming a beneficiary is faster and avoids probate. If you do not name a beneficiary, your estate goes through probate and the money goes to your heirs according to your will or state law.