How to Avoid Estate Taxes With Trusts

Accumulating wealth raises new concerns about taxation, both during your lifetime and beyond. Estate tax may be particularly worrisome if you plan to pass on a significant amount of assets to your heirs. You may be interested in whether you can avoid estate taxes with trusts, and there are certain situations where this could be an effective strategy. However, it’s important to understand that this is a limited, and fairly specific, tool. Here’s what you need to know.

For help with your estate plan, consider working with a financial advisor with estate planning expertise.

What Is the Estate Tax?

The estate tax is a tax on your right to transfer property when you die, according to the IRS. Your taxable estate is everything of value that you own, such as bank accounts, investments and real property, minus certain deductions.

Not everyone owes estate tax when they pass away. The federal estate tax exemption limit determines when estate tax is due. Here are the thresholds for the 2024, 2025 and 2026 tax years:

The One Big Beautiful Bill Act (OBBA) made some important changes to the federal estate tax. 

Higher exemption limits introduced by the 2017 Tax Cuts and Jobs Act (TCJA) were set to expire at the end of 2025, but the OBBBA made them permanent. The threshold increases to $15 million for individuals ($30 million for married couples) beginning in 2026, indexed annually for inflation. The Act did not change the estate tax rates.

As with all tax brackets, the estate tax applies only to assets above the cap. For example, on an estate worth $15 million, the IRS would only collect taxes on $1.01 million for the 2025 tax year.

This is an important distinction and one that people often get wrong. Similar to income taxes, assets above the estate tax cap have no impact on the assets below the cap. If your estate is worth $13 million, no estate tax is due. If your estate is worth $20 million, no estate tax is due on the first $13.99 million. The only question is whether any taxes are owed on assets above that cap.

Who pays the estate tax? If you die and are subject to estate tax,, the estate itself would pay any taxes owed to the IRS, not your heirs. Those who inherit from you would receive the remaining, post-tax assets. Estate tax rates are comparable to federal income tax rates, with brackets that scale from 18% at the lowest to 40% at the highest.

Revocable Trusts Cannot Avoid Estate Taxes

A trust is a legal arrangement in which one person, the grantor, transfers assets to the ownership of a trustee. The trustee has a fiduciary duty to manage trust assets in the best interests of the grantor, and according to their specific wishes.

There are two broad types of trusts: Revocable and irrevocable. A revocable or living trust is a trust that allows the grantor to make changes after its creation. For example, if you want to transfer more assets into the trust, remove assets or change the trust beneficiaries, you can do that. 

There are many uses for a revocable trust, particularly when it comes to helping your estate avoid probate issues. Unfortunately, you can’t avoid estate taxes with trusts that are revocable. Even though the transfer manages the trust assets on your behalf, you still retain control over them and bear responsibility for any estate tax associated with their transfer at death.

Irrevocable Trusts Can Remove Assets From Your Estate

An irrevocable trust follows the same principles as a revocable trust, with one key difference. When you make an irrevocable trust you sign over control of the included assets permanently. You can add new assets to the trust over time, but once it’s established you generally can’t change the terms of the trust without a court order. You also cannot withdraw or directly control assets held in the trust.

The downside to this is that you lose direct control over your assets. You can name yourself as a beneficiary, which allows you to receive and use anything based on the terms of the trust, but this isn’t the same thing as owning those assets directly.

The advantage of this is that you remove these assets from your estate. Once you put something in an irrevocable trust it legally belongs to the trust, not to you. Assets in an irrevocable trust do not contribute to the overall value of your estate which, for a particularly large estate, can shield those assets from potential estate taxes.

But that doesn’t mean the assets in an irrevocable trust are shielded from taxes altogether. Instead, the assets in an irrevocable trust are taxed at different rates depending on their status. In most cases this means either the trust itself pays income tax on undistributed gains, or a trust’s beneficiary pays income taxes on money they receive from that trust.

Residence Trusts Can Shield Real Property

A residence trust is a form of irrevocable trust that’s designed specifically for the transfer of your primary home.  You transfer your home into the trust’s name, listing yourself and your heirs as beneficiaries. Even though you technically no longer own it, you can continue using the home and maintaining it on behalf of your future heirs. 

Residence trusts remove the value of the home from your estate, allowing you to avoid estate taxes on that asset. This strategy is typically most useful to people who own high-value homes that would put them over the federal estate tax exemption limits. 

There are some requirements to know when establishing a qualified personal residence trust:

• The residence must be your primary residence, and the sole asset of the trust.
• You’ll need to choose a fixed term that represents how long you want to retain your right to live in the property.
• At the end of the term, the property passes to your beneficiaries.
• If you continue to live in the home at the end of the term, you’ll need to pay rent to your beneficiaries to preserve estate tax benefits. 

Lastly, and most importantly, there are no take-backs. If you change your mind after creating a residence trust and transferring your home, it’s virtually impossible to undo it.

Intentionally Defective Grantor Trusts

Finally, one of the most popular forms of trust for estate tax planning is known as the intentionally defective grantor trust.

One of the biggest downsides to transferring assets through an irrevocable trust is that it still involves some degree of tax liability. Even though you shield those assets from estate taxes, your heirs or the trust itself will still pay taxes. Typically this comes in the form of income taxes which either the trust pays or your heirs pay when they receive distributions.

You can mitigate that through the use of an intentionally defective grantor trust, or IDGT. This is an irrevocable trust into which you place assets, again shielding them from estate taxes. However, you maintain responsibility for paying taxes on the trust’s assets. This allows the trust to grow tax-free over time since you pay its taxes.

How Generation-Skipping Trusts Can Reduce Estate Tax

A generation-skipping trust (GST), is an estate planning tool designed to transfer wealth to grandchildren or later descendants without passing through the children’s estates. This structure allows assets to bypass one layer of estate taxation, which can be significant for multimillionaire households. By skipping the children’s estate, families can reduce the number of times the IRS collects transfer taxes on the same pool of wealth.

The estate tax applies when assets move from one generation to the next, but if property passes directly to grandchildren, a traditional transfer would normally trigger both estate tax and a generation-skipping transfer tax. A properly drafted GST, however, can use available exemptions to shelter those transfers from taxation. 

Here are some key points to know:

• In 2025, the exemption for generation-skipping transfers matches the estate tax exemption of $13.99 million per individual, allowing large amounts to move without incurring federal estate tax.
• The OBBBA increases the GSTT exemption limit to $15 million for individuals ($30 million for married couples) beginning in 2026.
• Unlike the estate tax exemption, the GSTT exemption is not portable for spouses.

Funding a GST means placing assets into the trust during life or at death, with terms that dictate how and when beneficiaries can receive distributions. The trust can provide income to children for life, while preserving the principal for grandchildren. Because the trust legally owns the assets, they are not counted in the child’s taxable estate when they pass away. 

One trade-off is that GSTs are subject to strict IRS rules and reporting requirements. The allocation of GST exemptions must be handled carefully to avoid triggering unintended taxes. In addition, once assets are placed in the trust, the grantor loses direct control over them, similar to other irrevocable trust structures. Beneficiaries may still face income taxes on distributions, but the overall estate tax savings can outweigh those costs.

For wealthy families looking to preserve assets across multiple generations, a generation-skipping trust offers a way to limit estate tax exposure and keep more wealth within the family. The effectiveness of this strategy depends on careful planning, timing, and proper use of exemptions. Working with an estate planning attorney or financial advisor is often necessary to structure a GST correctly and align it with broader financial goals.

Bottom Line

For every high-net-worth household, estate planning will involve some taxes. By using trusts, you can structure your way out of and around some of that liability. By setting up trusts to hold various assets, you can potentially reduce your overall estate tax liability. Trusts can work under the right circumstances and for the right assets, but they require a lot of planning.

Tips for Planning Your Estate

• To maximize the legacy you leave to your heirs, consider having a professional put together a comprehensive financial plan and investing strategy for you. A financial advisor can help you with both. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• It’s never pleasant to think about, but there may come a time when you’re unable to make decisions for yourself. For these scenarios, a living will or another form of advance directive can help ensure your family knows your wishes.

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