Establishing a trust can help you achieve many different estate planning objectives, especially preserving wealth from estate taxes.
With the federal estate tax exemption exceeding $12 million for 2022, only a small percentage of Americans need to worry about having to pay estate taxes at the federal level. However, 12 states, along with the District of Columbia, impose estate taxes at the state level.
Setting up a trust is one of the most tax-efficient methods of protecting wealth from estate taxes. While you can’t avoid them entirely if you have an extremely large estate, you can use various trust vehicles to minimize your exposure to estate taxes.
An estate planner and attorney can help you form these common trust instruments – and two may have the potential to minimize your exposure to estate taxes.
Revocable trusts can be essential to quickly transition assets held under trust to beneficiaries when you die since assets in a revocable trust bypass probate. However, because of the way this type of trust is structured, it offers no immediate tax benefits and won’t help the grantor avoid estate taxes.1
A credit shelter trust goes into effect when one spouse dies. Assets placed in the CST no longer count as part of the decedent’s estate and are managed by a trustee. Upon the death of the second spouse, the trust assets flow to the eventual named heirs of the trust without incurring any estate taxes.
The main purpose of forming a CST, also called a family or AB trust, is to transfer assets out of a spouse's name to lower the value of his or her estate. The surviving spouse does not control the assets but can conditionally access income from the trust while he or she is still alive. Due to the high exemption on federal estate taxes – which is double for married couples – this type of trust is a viable option primarily for ultra-wealthy couples whose estates surpass the estate tax exemption.
Working with a certified estate planner (CEP) can help you determine which type of trust may best meet your needs and objectives, especially if the goal is to avoid or minimize exposure to estate taxes.
1 Pros and Cons of Revocable Living Trusts, EideBailly, https://www.eidebailly.com/the-pros-and-cons-of-revocable-living-trusts
2 Irrevocable Trusts Explained, Investopedia, https://www.investopedia.com/terms/i/irrevocabletrust.asp