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Does a Revocable Living Trust Reduce Your Federal Estate Tax Liability?
Many people assume that once they establish and fund a revocable living trust, the assets in the trust will completely avoid federal estate taxes after their passing. However, in reality, a living trust doesn’t provide any special strategies for avoiding estate taxes.
The primary ways to reduce estate taxes—the unlimited marital deduction and the charitable deduction—apply whether assets are held in a trust or directly by an individual. The unlimited marital deduction allows assets to be transferred to a surviving US citizen spouse without incurring estate tax, while the charitable deduction allows tax-free transfers to qualifying charitable organizations. These deductions are not exclusive to living trusts and can be integrated into a trust-based estate plan to ensure tax-efficient asset distribution.
Before considering estate tax planning, it's important to understand that estate taxes apply only when the value of assets gifted during a person's life and at their death exceeds a specific threshold. This threshold is called the federal lifetime exclusion amount, which is $13.99 million for 2025. Unless the total assets in the revocable living trust and owned individually by the trustmaker exceed this amount, no federal estate tax will likely be owed at their death. For the sake of this article, we'll assume the trustmaker’s assets are valued above the lifetime exclusion threshold.
Important Note: If you live in a state with an estate tax, consult with an estate planning attorney to address any potential issues, as state estate tax thresholds are often lower than the federal threshold and may require additional planning.
Estate Taxes for Single Trustmakers
The two primary strategies mentioned—the unlimited marital deduction and the charitable deduction—are available to single individuals only through the charitable deduction. This deduction allows any assets in a person’s trust left to qualifying charitable organizations to be excluded from their taxable estate. Conversely, assets left to noncharitable beneficiaries will likely be subject to federal estate tax if the total estate exceeds the federal exemption limit. Therefore, if your beneficiaries include children, siblings, nieces and nephews, friends, other trusts, or a business, the property they inherit could be subject to estate taxes, depending on the size of your estate. Assets distributed to charitable organizations, however, are exempt from federal estate taxes.
Estate Taxes for Married Trustmakers
Married couples can benefit from both the charitable and unlimited marital deductions. The charitable deduction operates as previously described for single individuals. The unlimited marital deduction allows all assets transferred from a trust to a US citizen spouse to be free from estate taxes, provided the assets pass either directly to the spouse or are held in a special type of trust for their benefit.
For married individuals who create and fund a revocable living trust, the portion of the trust passing to the surviving spouse (using the unlimited marital deduction) will likely be exempt from estate taxes, while the portion passing to children may still be subject to estate tax, depending on the size of the estate and available exemptions at the time of death. If charitable organizations are named as beneficiaries, the assets directed to them will typically pass free from estate tax.
Should You Set Up a Revocable Living Trust?
Given that a revocable living trust doesn’t directly reduce your federal estate tax bill in ways that can’t be achieved by holding assets in your own name, why should you consider establishing one? Here are three key reasons:
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Avoiding Probate: Assets in a revocable living trust avoid the probate process, which can save time, money, and avoid court fees and legal expenses, depending on the state you live in.
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Planning for Mental Incapacity: If you become incapacitated, the successor trustee you designate in your trust can manage your assets without the need for a court-appointed guardianship or conservatorship. This can save considerable time and legal costs.
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Privacy for Your Final Wishes: A revocable living trust remains private after your death, unlike a will. Only your trustee and named beneficiaries typically need to know its contents, and in most cases, the trust does not have to be filed with the court, keeping your estate details confidential.
Final Thoughts on Revocable Living Trusts and Estate Taxes
While a revocable living trust doesn’t offer unique estate tax avoidance strategies, it can still be a useful tool in organizing your final affairs. The estate tax benefits associated with living trusts are not exclusive to them but can be incorporated into a broader estate plan that also provides significant benefits beyond tax savings, such as avoiding probate, planning for incapacity, and maintaining privacy.
If you want to learn more about how a revocable living trust could benefit you and your family, contact us today.
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