Which Types of Trusts Avoid Estate Taxes?

The federal estate tax can take a hefty chunk out of your estate. That lowers how much of your hard-earned wealth passes to your loved ones. The good news is that most of us don’t have an estate big enough to worry about the tax. But you don’t know what the future holds. You could strike it rich, or Congress could change the estate tax law. You can use trusts to lower your tax burden if you must deal with the estate tax.

This article explains how trusts can lower your tax bill. Tax laws are complex. Speaking with an experienced trust planning attorney in your area is a good idea. They can help you understand the different types of trusts.

What Is the Estate Tax?

A transfer tax is a tax that’s triggered when you transfer assets to another person. The income tax is the most well-known transfer tax. The federal estate tax is another transfer tax. It’s triggered when you pass your estate to your family members after you die.

To be liable for the estate tax, your estate must be worth more than the estate tax exclusion amount. So, only high-net-worth people have to pay the tax. The federal estate tax exemption is $12.92 million in 2023. That number doubles for married couples. You can transfer your estate and the unused part of your exemption to your surviving spouse tax-free. Only the amount of your estate above the exclusion is subject to the tax. The estate tax rate ranges from 18% to 40%, depending on the size of your taxable estate.

What Is the Gift Tax?

Gifting can be an effective way to reduce the size of your taxable estate. But you must pay a gift tax on gifts over a certain amount. In 2023, the gift tax exclusion amount is $17,000 per individual. So, you give up to $17,000 tax-free to each of your children, grandchildren, or anyone else.

What Types of Trusts Help With Estate Taxes?

You may need a better way than gifting to get your estate under the estate tax exclusion. In that case, you can use an irrevocable trust to lower the value of your estate even more.

An irrevocable trust is a trust you can’t revoke or change without a court order. When you make it, you name a third-party trustee. The trustee manages the trust’s assets and makes distributions to the trust beneficiaries. You give up ownership and control of the property you transfer to the trust. The IRS doesn’t count property you don’t own or control as part of your taxable estate.

The following are common irrevocable trusts people use for estate tax purposes:

• Irrevocable life insurance trust (ILIT): An ILIT moves your life insurance policy and its proceeds to a trust. The trust is also the beneficiary of the life insurance policy.
• Qualified personal residence trust (QPRT): You put real estate, like your personal home, into a QPRT. You name yourself and your family beneficiaries so you can still use your home.
• Charitable remainder trust (CRT) and charitable lead trust (CLT): Charitable trusts allow you to put assets into a trust to benefit charities. These trusts can also help with capital gains taxes and give you a charitable deduction.
• Grantor retained annuity trust (GRAT): A GRAT removes appreciating assets from your estate. It also lets you transfer those assets to your heirs without triggering the capital gains tax.

What Types of Trusts Don’t Help With Estate Taxes?

The revocable living trust is the most common type of trust. Passing your property to your heirs using a revocable trust can keep your estate out of probate. But it won’t reduce your estate tax liability. Because the grantor has the right to end a revocable trust, they don’t give up control of their assets. So, any property you put in a revocable trust isn’t removed from your taxable estate.

Contact an Estate Planning Attorney for Help

Crafting your estate plan to cut your estate tax liability is complex. You must properly set up your estate to take advantage of the tax benefits of trusts. Contact an experienced trust planning attorney for help. They can tell you about your options and help craft an estate plan that achieves your goals.