Estate and gift taxes are complex, and even small missteps can have significant financial consequences. You don’t want to inadvertently fall prey to the federal estate tax, which is currently 40% of your taxable estate. Read on to learn about four common pitfalls — and how to navigate around them.

1. Overlooking Gifting Strategies

Annual gifting is a proven way to reduce the size of your taxable estate at death. The annual gift limit is adjusted annually for inflation, but will remain at $19,000 for 2026. In 2025, you can transfer assets worth up to $19,000 ($38,000 for married couples) to individuals tax-free, with no limit on the number of recipients. So, if you have 10 grandchildren, annual gifts to each can make a substantial dent in your taxable estate over time. In 2025 alone, you could remove $380,000 from your estate if you’re married.

Gifts that exceed the annual limit reduce the amount of your lifetime gift and estate tax exemption. For 2025, the federal exemption is $13.99 million ($27.98 million for married couples). After you’ve used up your lifetime exemption, gifts above the annual limit will be subject to the 40% federal gift tax rate. The recent OBBBA tax legislation has increased the federal estate and gift exemption to $15 million starting in 2026, to be indexed annually for inflation.

In addition, you can make unlimited tax-free direct payments for medical expenses and tuition (excluding room and board, books, and fees). For example, in 2025, you could pay for a granddaughter’s $50,000 annual college tuition and make an additional $19,000 gift to her without incurring gift tax — but you must pay the tuition directly to a qualifying education organization. Should she fall ill, you also could pay any medical providers directly for her care without gift tax repercussions.

Another option is to set aside funds for a child’s or grandchild’s future education costs through a tax-advantaged Sec. 529 plan.  You may “super fund” a plan and contribute up to five times the annual exclusion in a single year and pay no gift tax.  For 2025 or 2026, that means you could contribute up to $95,000 ($190,000 for a married couple) – per beneficiary - to a 529 plan that will grow outside of your estate. Better yet, distributions will be tax-free to the beneficiary if used for education expenses. Be sure to consult with your tax advisor to help you with the proper reporting for gift tax purposes.  There are also state tax benefits available in some states, so it is important to take that into consideration when selecting a 529 plan.

2. Failing to Protect Life Insurance Proceeds

Life insurance often is part of an estate plan. You may intend for a designated beneficiary to receive the proceeds quickly without needing to first go through probate, or maybe you want the proceeds to pay the estate’s taxes and debts. Life insurance proceeds generally aren’t subject to federal or state income taxes for the beneficiary. However, they could end up part of your estate and use up a significant portion of your lifetime exemption if you’re not careful.

The critical issue is ownership of the policy. If the IRS determines that you own the policy, it will include the proceeds in your estate. In addition, any portion of the proceeds that remain at the beneficiary’s death will be included in his or her estate.

To overcome this potential pitfall, consider setting up an irrevocable life insurance trust to hold the policy. You can either transfer an existing policy to the trust or create such a trust to purchase a policy. The trust, which serves as the policy’s owner and beneficiary, can be structured to provide all income to designated beneficiaries and distribute principal as needed.

If you intend to contribute the funds to pay the premiums each year, there are special rules to follow to ensure that the premium gift qualifies for the annual exclusion and to prevent the trust funds from being pulled back into the taxable estate.  Be sure to consult an experienced fiduciary tax advisor or attorney to guide you through these rules. 

3. Assuming Your Estate is Too Small to Bother

Don’t look at today’s high lifetime exemption amount and assume your estate will fall below it. For starters, the amount could be reduced in the future. 

Regardless of the exemption amount, net worth typically grows as you age. So, the size of your estate at the time of your death is a moving target that can be hard to predict. 

Remember, too, that your spouse could live for decades longer than you, with the estate swelling over that time. Even if your estate is modest when you eventually die, your estate tax return should make the election for portability of the deceased spouse unused exclusion. The portability election allows your spouse to use your unused exemption to reduce or even avoid estate tax liability at the time of his or her death.  An estate tax return must be filed within a certain time limit to make the election.  KLR can help you through this process.

4. Going It Alone

In an era of online forms and do-it-yourself legal services, you might be tempted to handle your own gift and estate planning. But this approach can lead to costly mistakes, unintended tax liabilities and even legal disputes. While the upfront savings may seem appealing, the long-term risks far outweigh the short-term benefits, especially for high-net-worth individuals. 

FAQs- Common Gift & Estate Tax Mistakes

1. What’s the difference between the annual gift exclusion and the lifetime exemption?
   The annual exclusion allows tax-free gifts up to $19,000 per person per year. The lifetime exemption is the total amount you can gift or leave at death without incurring federal estate tax—$13.99 million per person in 2025.
2. Can I pay for my grandchild’s college tuition without affecting my lifetime exemption?
   Yes, as long as the payment is made directly to the educational institution, it doesn’t count against your gift or estate limits.
3. What happens if I don’t elect portability?
   Your unused exemption dies with you, and your surviving spouse may end up paying unnecessary estate taxes later.
4. What is an irrevocable life insurance trust and why would I need one?
   An ILIT is a trust that owns your life insurance policy, keeping the proceeds out of your taxable estate while ensuring they go to your chosen beneficiaries.