Estate Planning Taxation: Complete Guide to Minimizing Tax Liability in 2025

Let me be honest with you—estate planning taxation isn’t exactly cocktail party conversation material. But here’s the thing: it’s one of those topics that can either save your family a fortune or cost them dearly, depending on how well you understand the game. I’ve seen too many families get blindsided by tax bills they never saw coming, simply because nobody took the time to explain this stuff in plain English.

Think of estate planning taxation as the ultimate chess match with the IRS, where the rules keep changing and the stakes couldn’t be higher. It’s about how families hold onto their wealth and pass it down without Uncle Sam taking a bigger slice than he deserves.

Key Takeaways

• Federal estate tax exemption hits $13.99 million per person in 2025—that’s $27.98 million for married couples who know how to work the system
• Smart estate planning taxation can slash or completely eliminate your tax bill through clever use of trusts, annual gifting, and charitable strategies that actually work
• Twelve states plus Washington D.C. have their own estate taxes with much lower thresholds than federal rules—yeah, they can double-tax you
• The One Big Beautiful Bill Act gives us long-term certainty with exemptions jumping to $15 million per person by 2026, indexed for inflation through 2035
• You absolutely need professional help from estate planning attorneys and tax advisors—this isn’t a DIY project unless you enjoy expensive mistakes

Understanding Estate Planning Taxation Fundamentals

Estate planning taxation is like trying to solve a Rubik’s cube blindfolded—there are multiple moving parts, and one wrong twist can mess up everything you’ve accomplished. I’ve always believed that understanding the basics is half the battle, so let’s break this down into digestible pieces.

When I explain this to clients, I tell them there are four main tax categories you’re dealing with, and they all love to talk to each other. The federal estate tax swoops in when you transfer property at death and your estate exceeds certain thresholds. Gift taxes? They’re watching every move you make during your lifetime, keeping tabs on anything above those annual exclusion limits. Then you’ve got inheritance taxes in certain states that basically tax your kids for receiving what you worked your whole life to build. And finally, there’s the generation skipping transfer tax—the government’s way of saying “nice try” when you attempt to skip a generation with your wealth transfers.

Here’s what makes this whole system particularly frustrating: these taxes don’t work in isolation. They’re interconnected like a spider web, and pulling one string affects everything else. The unified credit system connects federal estate and gift taxes, meaning those generous lifetime gifts you’re making? They’re eating into your estate tax exemption. It’s like having a shared bank account between your current self and your future estate.

But here’s the silver lining I’ve discovered after years of working in this field—proper planning can be absolutely game-changing. Without any strategy, some estates face combined federal and state tax rates over 50%. That’s brutal. But with the right moves? You can often bring that down to zero or close to it. The difference between planning and winging it can literally be millions of dollars.

Federal Estate Tax: Rules and Current Exemptions

Let’s talk about the federal estate tax system in 2025, because honestly, it’s pretty generous if you know how to work with it. The exemption sits at $13.99 million for individuals—that’s nearly $14 million you can pass along tax-free. For married couples playing their cards right, we’re talking about protecting up to $27.98 million. Not too shabby, right?

Here’s something that might surprise you: the federal estate tax only affects the wealthiest 0.2% of Americans. That’s fewer than 2 out of every 1,000 people who die in any given year. So if you’re reading this and panicking, take a breath. You’re probably fine on the federal level.

But if you do cross that threshold, the tax rates aren’t playing around. They start at 18% and climb all the way to 40%, with the top rate kicking in at $1 million above the exemption. It’s a progressive system, though, which means even estates that owe tax often pay much less than that maximum rate.

When the IRS calculates your gross estate, they’re not messing around—they want everything valued at current fair market value. Real estate, business interests, investment accounts, life insurance proceeds, retirement plans, that antique collection you’ve been hoarding—all of it counts. They’re looking at what everything is worth today, not what you paid for it decades ago.

The good news? There are some serious deductions available. The unlimited marital deduction is a beautiful thing—you can pass everything to your spouse tax-free. Charitable deductions give you dollar-for-dollar reductions. And all those administrative expenses, debts, and funeral costs? They reduce your taxable estate too.

I love the unified credit system because it gives families flexibility. You can use your exemption during life through gifts, or save it for death, or split it between both. The key is understanding that lifetime gifts above annual exclusions eat into your estate tax exemption. It’s all one big bucket.

The One Big Beautiful Bill Act (OBBBA) is a game-changer because it gives us certainty. Starting in 2026, exemptions jump to $15 million per person ($30 million for couples), with inflation adjustments through 2035. Finally, families can make long-term plans without wondering if Congress is going to pull the rug out from under them.

Gift Tax Planning Strategies

Here’s where things get fun—strategic gifting is like compound interest for tax savings. The annual gift tax exclusion for 2025 lets you give $19,000 per recipient without any tax consequences or exemption usage. Married couples can double that to $38,000 per recipient. It’s like having a tax-free allowance that resets every January 1st.

I’ve always been amazed by the math on this. Let’s say you’re a married couple with three kids and six grandchildren. You can transfer $342,000 annually ($38,000 × 9 recipients) without touching your lifetime exemptions or paying a dime in gift tax. Do that for ten years, and you’ve moved over $3.4 million out of your estate, along with all the future growth on those assets.

Lifetime gifts above the annual exclusions use up your unified credit, but they can still be incredibly smart moves. Why? Valuation advantages and rate differences. When you gift minority interests in family businesses or investment entities, you often get valuation discounts of 20-40%. It’s like buying estate tax relief at a discount.

Educational and medical expense exemptions are the gift tax world’s best-kept secrets. You can pay unlimited amounts for tuition and medical bills without using annual exclusions or lifetime exemptions, as long as you pay the providers directly. Grandparents love this one—they can fund their grandchildren’s education without any gift tax consequences.

Timing matters more than you might think. Making gifts early in the year gives assets more time to appreciate outside your estate. If you own volatile assets, timing gifts to capture low valuations can be brilliant. Business owners often gift interests before major value-enhancing events—it’s legal and smart.

Just watch out for the three-year rule. If you transfer certain assets and die within three years, they get pulled back into your estate for tax purposes. This mainly affects life insurance policies and retained interests in transferred property. Plan early and plan smart to avoid this trap.

State-Level Estate and Inheritance Taxes

State estate and inheritance taxes are like surprise fees on your phone bill—you don’t see them coming until it’s too late, and they can be painfully expensive. Twelve states plus Washington D.C. impose estate taxes, and unlike the generous federal exemptions, state thresholds can be much lower.

I’ve seen middle-class families get hit with state estate taxes even though they owe nothing to the feds. Massachusetts and Oregon start their estate taxes at just $1 million. Imagine working your whole life to build a modest estate, only to get smacked with a tax bill because you happened to live in the wrong state.

The range is pretty wild. Connecticut follows federal exemption levels at $12.92 million, while Massachusetts hits you at $1 million. Tax rates typically run from 0.8% to 20%, and here’s the kicker—these are in addition to any federal estate taxes. Some estates in high-tax states can face combined rates exceeding 50%. That’s not a tax; that’s highway robbery.

Inheritance taxes work differently—they tax the people receiving the money rather than the estate itself. Five states currently impose these: Iowa, Kentucky, Maryland, Nebraska, and Pennsylvania. Maryland is special (and not in a good way) because it hits you with both estate and inheritance taxes. Talk about adding insult to injury.

Here’s a quick breakdown of what we’re dealing with:

Connecticut follows federal rules with a $12.92 million exemption and 12% top rate. Massachusetts has the lowest threshold at $1 million with a 16% top rate. Maryland uniquely imposes both types of taxes—estate tax with a $5 million exemption and inheritance tax that varies by relationship. Pennsylvania only has inheritance tax but no estate tax. Washington has a $2.193 million exemption with a 20% top rate and no state income tax to soften the blow.

For high-net-worth families, residency planning becomes crucial. Moving to Florida, Texas, or Nevada can eliminate state-level estate tax exposure entirely. But you can’t just change your driver’s license and call it a day—you need to establish genuine residency with proper documentation.

Trust planning gets complex when families live in multiple states. Some states try to tax trusts based on where beneficiaries live, others focus on trustee location, and still others look at where assets are located. Smart structuring can minimize exposure while keeping families happy.

Advanced Estate Planning Tax Strategies

This is where estate planning gets really interesting—and really complex. Advanced strategies are like power tools: incredibly effective in the right hands, but dangerous if you don’t know what you’re doing. I’ve seen these techniques save families millions, but I’ve also seen them backfire spectacularly when implemented incorrectly.

Trust-based planning is the foundation of almost every sophisticated estate planning strategy. The basic principle is elegant: separate legal ownership from beneficial enjoyment. You remove assets from your taxable estate while preserving some family access through carefully crafted distribution standards and administrative powers. It’s like having your cake and eating it too, if you structure it right.

Generation-skipping transfer tax planning lets families create multigenerational wealth dynasties. The GST exemption for 2025 matches the federal estate tax exemption at $13.99 million per person. Properly allocate this exemption to trusts and direct transfers, and you can create tax-free growth for your grandchildren, great-grandchildren, and beyond.

Charitable remainder trusts are brilliant for families with philanthropic hearts and tax-saving minds. You get immediate income tax deductions while removing asset appreciation from your estate. The trust pays income to family members for specified terms, then the remainder goes to charity. Everyone wins—family gets income, charity gets a gift, and you get tax deductions.

Private foundations offer the ultimate in legacy planning. You get immediate estate and income tax deductions while creating a lasting philanthropic legacy. Family members can stay involved in charitable activities across generations, and operating foundations can even provide employment opportunities.

Trust-Based Tax Planning

Irrevocable trusts are the Swiss Army knives of estate planning—versatile, powerful, and essential for serious tax planning. These structures legally remove assets from your estate while preserving family access through smart distribution standards and administrative powers.

Spousal Lifetime Access Trusts (SLATs) are particularly clever for married couples. One spouse creates and funds a trust benefiting the other spouse and children. This removes assets from both taxable estates while maintaining family access. Couples can create reciprocal SLATs to maximize exemption usage while preserving access for both spouses.

Intentionally Defective Grantor Trusts (IDGTs) combine estate tax savings with income tax benefits in a way that seems almost too good to be true. The grantor retains just enough control to remain responsible for trust income taxes while removing assets from the estate. Those income tax payments represent additional tax-free gifts to beneficiaries—it’s like making gifts with invisible money.

Dynasty trusts take advantage of generation-skipping exemptions to create perpetual tax-free growth. In states without rule against perpetuities limitations, these trusts can continue indefinitely, providing tax-free appreciation for hundreds of years. With proper GST exemption allocation, all distributions and terminations become tax-free to beneficiaries.

Credit shelter trusts ensure married couples maximize their combined exemption usage. When the first spouse dies, these trusts receive assets equal to the deceased spouse’s available exemption. The surviving spouse and children can access income and principal, but the assets don’t count in the surviving spouse’s estate. It’s a way to preserve both exemptions while maintaining family access.

Life Insurance in Estate Tax Planning

Life insurance in estate planning is like a financial magic trick—when done right, it creates wealth out of thin air while providing incredible tax benefits. But mess up the structure, and you’ll face unexpected tax consequences that can ruin your entire plan.

Death benefits to named beneficiaries typically avoid income tax, but they can get trapped in your estate if you retain ownership incidents. The solution? Irrevocable Life Insurance Trusts (ILITs) that own the policies and pay premiums using annual exclusion gifts. Death benefits pass to beneficiaries estate-tax-free while providing liquidity for estate taxes or family needs.

The three-year rule is a trap waiting to catch the unwary. Transfer a life insurance policy and die within three years? The proceeds get pulled back into your estate for tax purposes, regardless of your intentions. Start ILIT planning early to avoid this completely.

Premium financing strategies let wealthy individuals acquire large policies using borrowed funds, with policy values as security. These arrangements provide massive leverage when structured properly, but they require careful monitoring to avoid unexpected tax consequences.

Split-dollar arrangements allow business owners to share life insurance costs and benefits with key employees or family members. These can provide estate planning benefits while addressing business succession needs, but recent regulations require careful structuring.

When combined with generation-skipping planning, life insurance becomes even more powerful. ILITs structured as dynasty trusts with proper GST exemption allocation create perpetual tax-free benefits for multiple generations. It’s like creating a family endowment funded by insurance.

Business Succession and Estate Tax Planning

Business owners face unique challenges because their wealth is often concentrated in one asset—the business itself. I’ve worked with families where 80-90% of their net worth was tied up in a single company. That concentration creates both opportunities and risks that require specialized planning.

Valuation discounts are probably the most valuable tool available to business owners. Minority interests in family businesses typically qualify for discounts ranging from 20% to 50% of their proportionate values. These discounts reflect the limited rights and restricted transferability common in family business structures. It’s perfectly legal and incredibly powerful.

Family Limited Partnerships (FLPs) and Limited Liability Companies (LLCs) provide the perfect vehicles for implementing these discounts. Parents retain managing interests while gifting minority interests to children at discounted values. You can transfer substantial business value within gift and estate tax exemptions while maintaining control. It’s control with a discount—what’s not to love?

Grantor Retained Annuity Trusts (GRATs) are brilliant for high-growth businesses. You retain annuity payments for a specified term while transferring remainder interests to beneficiaries. If business growth exceeds the Section 7520 rate, excess appreciation transfers tax-free to the next generation. It’s like placing a bet on your own business success.

Sales to Intentionally Defective Grantor Trusts (IDGTs) provide another powerful technique. You sell business interests to a trust in exchange for promissory notes, removing future appreciation from your estate while retaining an income stream. Plus, paying income taxes on trust income represents additional tax-free gifts to beneficiaries.

Employee Stock Ownership Plans (ESOPs) offer unique benefits for business owners seeking liquidity while providing employee benefits. ESOP sales can defer or eliminate capital gains taxes when proceeds are reinvested in qualified securities. You get liquidity for estate planning while employees gain ownership in business success.

Buy-sell agreements impact business valuations for estate tax purposes and should reflect fair market value principles. These agreements can provide estate liquidity through mandatory buyouts while establishing valuation frameworks for tax purposes. Keep them updated with regular appraisals to support intended tax results.

Charitable strategies work particularly well for business owners with philanthropic inclinations. Charitable Remainder Trusts can sell business interests tax-free while providing income streams. Private operating foundations can employ family members while advancing charitable purposes and providing estate tax deductions.

Income Tax Considerations in Estate Planning

Estate planning isn’t just about transfer taxes—income tax implications can significantly affect overall wealth preservation and family financial outcomes. The interplay between these different tax systems requires careful coordination to optimize the overall tax burden.

The step-up in basis rule is one of the most valuable income tax benefits in the entire tax code. Assets included in a decedent’s estate receive a new income tax basis equal to their fair market value at death, eliminating capital gains taxes on pre-death appreciation. For highly appreciated assets, this benefit can be worth more than the estate tax cost.

This creates an interesting planning dilemma: gift appreciated assets during life and preserve estate tax exemptions, or hold them until death to get the step-up in basis? Gifted assets retain the donor’s basis, potentially creating capital gains tax liability for recipients. Inherited assets receive the stepped-up basis, eliminating gain recognition. The math isn’t always obvious.

The Net Investment Income Tax (NIIT) adds an extra 3.8% tax on investment income for high-income individuals and trusts. Trust income tax rates reach maximum levels at much lower thresholds than individual rates—$15,200 for trusts versus $609,350 for individuals in 2025. This makes trust income tax planning particularly important for wealthy families.

State income tax considerations add another layer of complexity. Some states impose no income tax, while others have rates exceeding 10%. Trust situs planning can minimize state income tax exposure while preserving other benefits. It’s like tax arbitrage at the state level.

Retirement plan distributions create unique challenges because these assets face income tax liability when distributed while potentially being subject to estate taxes if held at death. Roth IRA conversions during life can eliminate income tax liability for beneficiaries while potentially reducing estate tax exposure through income tax payments.

Trust distribution strategies require careful coordination of income and transfer tax objectives. Distributions carry out distributable net income to beneficiaries, shifting income tax liability from trust to individual rates. Timing and recipient selection can minimize overall family income tax burdens while achieving transfer tax goals.

Estate Planning for Different Family Situations

One size definitely doesn’t fit all in estate planning. Every family situation presents unique opportunities and challenges that require specialized approaches. What works brilliantly for one family might be completely wrong for another.

Married couples benefit from several unique provisions that single individuals can’t access. The unlimited marital deduction allows tax-free transfers between spouses during life and at death, effectively deferring estate taxes until the surviving spouse’s death. Portability elections enable surviving spouses to use any unused exemption from the deceased spouse, potentially doubling the family’s total exemption.

QTIP (Qualified Terminable Interest Property) trusts provide married couples with control over ultimate asset distributions while obtaining marital deductions. The surviving spouse receives income for life, with remainder interests passing according to the first spouse’s directions. These trusts prove particularly valuable in blended families where current spouses want to provide for each other while ensuring assets ultimately benefit their respective children.

Blended families face complex challenges due to competing interests between current spouses and children from prior relationships. QTIP trusts can balance these interests while providing estate tax benefits. Generation-skipping planning becomes more complex when step-relationships are involved, as GST exemptions typically don’t apply to non-blood relatives.

Special needs beneficiaries require extremely careful planning to preserve government benefits eligibility while providing family support. Special needs trusts can receive inheritances and gifts without disqualifying beneficiaries from means-tested programs like Supplemental Security Income or Medicaid. These trusts require specific language and administration to maintain benefit eligibility.

International families and non-U.S. citizens face additional complexities. Non-resident aliens receive only a $60,000 federal estate tax exemption on U.S. assets—a huge difference from the $13.99 million available to citizens. Tax treaties may provide relief, but require careful analysis to optimize benefits.

Single individuals often focus on charitable planning and maximizing benefits for intended beneficiaries. Without marital deductions, single individuals may face earlier estate tax exposure but can benefit from charitable deductions and advanced planning techniques. Unmarried couples require particular attention since many legal provisions favor family members over unmarried partners.

Recent Legislative Changes and Future Outlook

The estate planning world has been on a roller coaster for the past several years, with exemption amounts bouncing around like a tennis ball. But the One Big Beautiful Bill Act (OBBBA) finally provides the long-term certainty that families and their advisors have been desperately seeking.

Before the OBBBA, we were living with temporary exemption increases that were set to expire, creating massive uncertainty about future exemption levels. Families couldn’t make long-term plans because nobody knew whether exemptions would be $5 million, $13 million, or something else entirely. It was like trying to plan a trip without knowing if your airline would still exist next year.

The OBBBA changes all that by establishing permanent exemption amounts through 2035. Starting in 2026, individual exemptions increase to $15 million with married couples eligible for combined $30 million exemptions. These amounts include automatic inflation adjustments annually, ensuring exemptions maintain real purchasing power over time.

This legislative certainty creates incredible planning opportunities. Families can implement multi-decade strategies without concern about exemption reductions disrupting their plans. Dynasty trust planning becomes much more attractive when you know the rules won’t change for the next decade plus.

The legislation maintains the unified credit system linking estate and gift taxes while preserving generation-skipping transfer tax exemptions at equivalent levels. Portability rules continue for married couples, and the GST exemption includes the same inflation adjustments, maintaining its effectiveness for multi-generational planning.

Beyond transfer tax provisions, the tax code continues evolving in other areas that affect estate planning strategies. Potential changes to income tax rates, capital gains treatment, and retirement plan rules all impact overall planning approaches. Families should monitor these developments while implementing current planning opportunities.

State estate and inheritance tax laws remain subject to individual state legislative processes, creating ongoing complexity for multi-state families. Some states may conform to federal exemption increases, while others may maintain current thresholds or modify their systems independently. This requires ongoing monitoring of state-specific developments.

International tax provisions affecting estate planning continue developing, particularly regarding foreign account reporting and tax treaty provisions. Families with international assets need to stay current with these evolving rules while implementing appropriate planning strategies.

Implementation and Professional Guidance

Here’s something I learned early in my career: estate planning is absolutely not a DIY project. The sophisticated nature of modern estate planning makes professional assistance essential for optimal results. I’ve seen too many families try to save money on professional fees only to lose exponentially more through mistakes and missed opportunities.

Estate planning attorneys provide essential legal expertise in drafting and implementing complex trust structures, business entities, and succession plans. These professionals understand state-specific laws affecting trust validity, property rights, and fiduciary responsibilities. Their expertise ensures proper legal structure while minimizing risks of challenges or unintended consequences.

Tax professionals, including CPAs and tax attorneys, provide crucial guidance on income, gift, estate, and generation-skipping transfer tax implications of various planning strategies. These professionals prepare required tax returns, advise on timing strategies, and ensure compliance with complex tax laws. Their involvement is essential for families implementing advanced planning techniques.

Financial advisors coordinate investment management, insurance planning, and overall wealth management strategies supporting estate planning objectives. They help families balance liquidity needs, risk management, and growth objectives while implementing transfer tax planning strategies. Their ongoing involvement ensures plans remain aligned with changing family circumstances.

Annual review requirements stem from changing tax laws, family circumstances, and asset values affecting optimal planning strategies. I recommend families schedule regular reviews with their professional team to ensure plans remain current and effective. Significant life events—births, deaths, marriages, divorces—may require immediate plan modifications.

Documentation requirements include proper trust agreements, gift documentation, annual exclusion letters, and timely tax return filings. Gift tax returns are required for gifts exceeding annual exclusions, even when no tax is due due to lifetime exemptions. Estate tax returns must be filed for estates exceeding filing thresholds, regardless of actual tax liability.

Timing considerations affect optimal implementation strategies. Gift timing can affect valuations, particularly for volatile assets or business interests. Trust funding timing affects income tax consequences and exemption utilization. Professional guidance ensures optimal timing for maximum tax benefits.

Implementation often involves coordinating multiple moving parts—legal document preparation, asset transfers, trust funding, insurance acquisitions, and tax return filings. Professional project management ensures all elements are properly coordinated and completed within required timeframes.

FAQ

What happens to my estate plan if I move to a different state with different tax laws?

Moving states can completely upend your estate planning strategy—I’ve seen families face unexpected tax bills simply because they relocated without updating their plans. If you move from a no-estate-tax state to one that imposes estate or inheritance taxes (or vice versa), you’ll need a complete plan review with professionals familiar with your new state’s laws.

Trust validity, property rights, and tax obligations can vary dramatically between states. Some states try to tax trusts based on your previous or current residence, making careful planning essential. You might need to update documents to comply with new legal requirements while restructuring assets to minimize tax exposure in your new jurisdiction.

Can I change or revoke irrevocable trusts if tax laws change significantly?

This is the million-dollar question, and the short answer is: generally no, but there might be options. Irrevocable trusts are called “irrevocable” for a reason—that’s what provides their estate tax benefits. However, several escape hatches might be available depending on your trust terms and state law. Some trusts include provisions for modification under changed circumstances, while state laws may permit judicial modifications when tax laws change substantially.

Trust protectors, if you were smart enough to appoint them, may have powers to modify terms. Beneficiaries sometimes can agree to trust modifications through non-judicial settlement agreements. Decanting—where permitted—allows trustees to distribute trust assets to a new trust with more favorable terms. Professional guidance is absolutely essential to explore options without jeopardizing intended benefits.

How do cryptocurrency and digital assets factor into estate tax planning?

Cryptocurrency and digital assets get the same estate tax treatment as any other asset—they’re valued at fair market value at death and included in your estate. But they present unique challenges that traditional assets don’t. The volatility makes valuation complex, storage methods create access issues, and you need to ensure fiduciaries can actually access digital wallets and accounts. I recommend secure password management systems or professional custodial services.

The valuation can be particularly challenging for less liquid cryptocurrencies or NFTs. On the positive side, gift tax planning with digital assets can be effective due to their volatility, allowing strategic timing of transfers at low values. Just make sure you have professional guidance for proper integration into your overall strategy.

What are the penalties for failing to file required gift or estate tax returns?

The penalties can be brutal and they accumulate over time like credit card interest. Gift tax return penalties start at 5% of the tax due per month, maxing out at 25%, plus interest on unpaid amounts. Here’s the kicker: even when you don’t owe any tax because you have lifetime exemptions available, failing to file can result in penalties and loss of important benefits like statute of limitations protection.

Estate tax return penalties follow similar structures but can be much larger due to higher tax amounts. Additionally, if you don’t properly report gifts, the IRS can challenge them forever because the statute of limitations never starts running. Professional preparation of these returns is worth every penny to ensure compliance and preserve intended tax benefits.

How does the generation-skipping transfer tax interact with state inheritance taxes?

The GST tax is exclusively federal and applies to transfers to grandchildren and more remote descendants, while state inheritance taxes are imposed by individual states on beneficiaries receiving assets. These operate independently, so you could potentially face both GST tax federally and inheritance tax at the state level on the same transfer—talk about getting hit twice! However, proper planning can often minimize or eliminate both.

GST exemption allocation can make transfers to skip persons free from federal GST tax, while strategic trust planning and residency considerations can minimize state inheritance tax exposure. The interaction gets particularly messy in states that impose inheritance taxes based on beneficiary residence rather than decedent residence, requiring careful coordination of federal and state planning strategies.