Reducing the Estate Tax

Michael, a 68-year-old widower, wants to ensure that his estate passes efficiently to his two children while minimizing estate taxes and avoiding probate. His estate is valued at $5 million, and he has a revocable living trust, a will, and a durable power of attorney. Which of the following strategies would be most effective in further reducing his estate for tax purposes?

Convert his revocable living trust into an irrevocable trust.
Name his children as beneficiaries on his retirement accounts and life insurance policies.
Make annual gifts up to the gift tax exclusion amount to his children and grandchildren.
Add his children as joint owners on all his bank and investment accounts.

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Answer: C

One of the most effective ways to reduce estate taxes is to make annual gifts up to the federal gift tax exclusion limit ($19,000 per recipient in 2025). These gifts reduce the taxable estate over time without incurring gift tax, making them a powerful tool for estate planning.

A is incorrect because converting a revocable trust into an irrevocable trust would remove assets from Michael’s estate, but it would also limit his control over those assets, which may not align with his overall estate planning goals.
B is incorrect because naming beneficiaries on retirement accounts and life insurance policies helps avoid probate but does not reduce the taxable estate.
D is incorrect because adding children as joint owners on accounts could lead to unintended tax and legal consequences, including potential exposure to creditors.

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