Many believe that once one sets up and funds a revocable living trust, property held in the trust will completely avoid federal estate taxes after they die. In reality, a living trust does not provide any unique estate tax avoidance strategies. This article does address the reasons why someone would want a revocable living trust but first we will discuss estate tax reduction opportunities.
The primary mechanisms for reducing estate taxes—the unlimited marital deduction and the charitable deduction—apply whether money or property (sometimes referred to generally as assets) are held in a trust or held directly by an individual. The unlimited marital deduction allows the transfer of assets to a US citizen surviving spouse free from estate tax, while the charitable deduction permits tax-free transfers to qualifying charitable organizations. These deductions are not exclusive to living trusts but can be incorporated into a trust-based estate plan to ensure that assets are distributed tax-efficiently.
Before delving into estate tax planning, it is important to understand that estate taxes come into play only when someone gifts assets during their lifetime and at their death that combine to exceed a certain threshold value. This threshold is called the federal lifetime exclusion amount and is currently $13.99 million for 2025. Unless the trustmaker and the trustmaker’s revocable living trust have combined assets exceeding this amount, there will likely be no federal estate tax due at a trustmaker’s death. However, for purposes of this article, we will assume that the trustmaker’s assets owned individually and in the revocable trust are valued at more than the lifetime exclusion amount.
Caution: If your clients live in a state with a state estate tax, they need to work with an experienced estate planning attorney to ensure that these concerns are addressed appropriately, as state estate tax thresholds are often lower than the federal threshold and may require additional planning.
Single Trustmakers and Estate Taxes
Of the two planning strategies mentioned above—the unlimited marital deduction and the charitable deduction—only the charitable deduction tool is available to single individuals. With this tool, all assets in a person’s trust left to qualifying charitable organizations will be removed from the trustmaker’s taxable estate. On the other hand, the assets left to noncharitable beneficiaries will likely be exposed to federal estate tax liability if the remaining assets exceed the current federal exemption amount. In other words, if your client’s beneficiaries are their children, their brothers and sisters, their nieces and nephews, their best friend, another trust, or even a for-profit business, then the property they inherit through the trust could be subject to federal estate tax depending on the size of your client’s remaining estate. Otherwise, any property distributed to qualifying charitable organizations through the trust passes free from federal estate tax.
Married Trustmakers and Estate Taxes
Married couples have both the charitable and unlimited marital deductions available to them. The charitable deduction functions the same way as described above for the single individual. With the unlimited marital deduction, all qualifying transfers of assets held in your client’s trust that pass to their US citizen spouse after one’s death will likely not be subject to estate taxes due to the unlimited marital deduction. However, to be deemed a qualifying transfer, the assets must either pass to the spouse outright or be held and administered in a special type of trust for their spouse’s benefit.
On the other hand, if your client is married and they create and fund a revocable living trust and name both their spouse and their children as current beneficiaries after they die, the portion of the trust passing to their spouse (utilizing the unlimited marital deduction) will likely not be subject to federal estate tax, and the portion passing to their children may be subject to estate tax (depending on the value of the assets and the federal lifetime exclusion amount available to them when they pass). If they include one or more qualifying charitable organizations as beneficiaries, the portion passing to the charities will likely not be subject to estate tax.
Do Your Clients Need a Revocable Living Trust?
If a revocable living trust does nothing to reduce your client’s federal estate tax bill that cannot be done by holding the assets in their own name; you may ask, why then should they consider setting one up? There are at least three good reasons:
- To avoid probate. Assets held in a revocable living trust at the time of death will avoid the court proceeding known as probate. Depending on the state of residence at the time of death, this could save a great deal of time and thousands of dollars in legal fees and court costs.
- To plan for mental incapacity. If one becomes unable to manage affairs while still alive, the successor trustee named in the revocable living trust will be able to manage trust assets without the need for court involvement. Like the benefit of avoiding probate discussed above, removing the need for a court-supervised guardianship or conservatorship could save time and thousands of dollars in legal fees and court costs, depending on the state of residence.
- To keep final wishes private. A revocable living trust is a private agreement that remains private after one dies. In most cases, the only people who will need to know the terms of the trust and what will occur during administration are the trustee and the named beneficiaries. Usually, this document is not required to be filed with the court, which will prevent strangers from knowing what is owned and how what is owned is to be distributed and managed.
Final Thoughts on Revocable Living Trusts and Estate Taxes
For many people, a revocable living trust is the ideal way to organize their final affairs. While the estate tax avoidance tools used by a living trust are not exclusive to such trusts, they can be incorporated into a trust-based estate plan to capture the general benefits that living trusts offer and provide equally important additional benefits unrelated to tax savings.
If you are interested in learning more about a revocable living trust and its benefits for you or your clients, call us at 708.448.5169.eir final affairs. While the estate tax avoidance tools used by a living trust are not exclusive to such trusts, they can be incorporated into a trust-based estate plan to capture the general benefits that living trusts offer and provide equally important additional benefits unrelated to tax savings.
If you are interested in learning more about a revocable living trust and its benefits for you and your loved ones, call us at 708.448.5169.
