Who This Applies To
Note: The current high exemption thresholds are set by the 2017 Tax Cuts and Jobs Act and are scheduled to sunset after 2025, potentially reverting to roughly half their current level (adjusted for inflation) in 2026. Households near or above the threshold should plan now. Always consult a licensed estate attorney for current law.
How the Estate Tax Works
The estate tax is a transfer tax — like income or capital gains taxes — that triggers when someone receives assets from a deceased benefactor. Unlike most transfer taxes, it is borne by the estate, not the recipient. Your heirs receive the remaining post-tax assets.
This is an important distinction that people often misunderstand — similar to income tax brackets. Assets above the cap do not affect the tax treatment of assets below the cap. A $13 million estate owes nothing. A $20 million estate owes tax only on the amount above $13.99 million.
Estate tax rates scale progressively from 18% at the lowest bracket to 40% at the highest:
| Taxable Amount Above Exemption | Marginal Rate |
|---|---|
| Up to $10,000 | 18% |
| $10,001 – $20,000 | 20% |
| $20,001 – $40,000 | 22% |
| $40,001 – $60,000 | 24% |
| $60,001 – $80,000 | 26% |
| $80,001 – $100,000 | 28% |
| $100,001 – $150,000 | 30% |
| $150,001 – $250,000 | 32% |
| $250,001 – $500,000 | 34% |
| $500,001 – $750,000 | 37% |
| $750,001 – $1,000,000 | 39% |
| Over $1,000,000 | 40% |
Four Types of Trusts for Estate Planning
Trusts are one of the primary tools high-net-worth households use to manage estate tax exposure. The key distinction is between revocable and irrevocable trusts — only irrevocable trusts can remove assets from your taxable estate.
A revocable or “living” trust is set up during your lifetime and you maintain full control over it. You can move assets in and out, change beneficiaries, adjust terms, and revoke it entirely. This is the most common form of trust.
Revocable trusts are valuable for many purposes — particularly avoiding probate, managing assets if you become incapacitated, and providing privacy since trusts do not go through public probate proceedings. Estate tax relief is not one of their uses. Because you retain control over the assets, they remain part of your taxable estate.
Avoids probate; maintains control; easy to modify; useful for incapacity planning
Assets remain in your taxable estate; provides no estate tax reduction whatsoever
When you create an irrevocable trust, you sign over control of the included assets permanently. You name beneficiaries, specify how assets will be managed and distributed, and designate initial assets. Once established, you cannot change terms without a court order and cannot directly access the contributed assets.
You can name yourself as a beneficiary — allowing you to receive distributions based on the trust’s terms — but this is not the same as direct ownership. The advantage is decisive: assets in an irrevocable trust legally belong to the trust, not to you. They do not contribute to the value of your taxable estate.
Assets in an irrevocable trust are not tax-free, however. They are taxed differently: the trust itself pays income tax on undistributed gains, or beneficiaries pay income tax on distributions they receive.
Removes assets from taxable estate; protects assets from creditors; potential Medicaid planning benefits
You lose direct control; terms cannot be changed without court order; trust or beneficiaries still owe income tax
A Qualified Personal Residence Trust (QPRT) is a form of irrevocable trust specifically designed for real property. You transfer your home into the trust, naming yourself and your heirs as beneficiaries. You retain the right to live in the home for a specified term; after that term, ownership passes to your heirs.
Because the trust owns the property — not you — it does not contribute to your taxable estate. This is particularly useful for “house-rich” individuals whose primary asset is a highly appreciated home. Your heirs can continue to use the property after your death.
The gift to heirs is valued at a discount because of your retained right to live there — meaning the taxable gift is less than the full property value, creating an additional planning advantage.
Removes appreciated real estate from estate; you retain right to use the property; gift is valued at a discount
Irrevocable once established; if you die before the trust term ends, the home reverts to your estate; heirs may lose stepped-up basis
The IDGT is one of the most powerful and popular tools for high-net-worth estate planning. It is “defective” in a specific and intentional sense: structured so that for income tax purposes, the grantor (you) is treated as the owner — meaning you pay income taxes on the trust’s earnings. For estate tax purposes, however, the assets belong to the trust and are outside your estate.
This creates a powerful double benefit. First, assets in the trust are shielded from estate taxes. Second, by paying the trust’s income taxes personally, you are effectively making an additional tax-free gift to the trust — the trust’s assets grow without being depleted by income taxes, compounding the estate planning benefit over time.
IDGTs are often used for asset sales: you can sell appreciated assets to the IDGT in exchange for a promissory note. This transfers the appreciation out of your estate without triggering capital gains tax at the time of sale.
Shields assets from estate tax; trust grows tax-free (grantor pays income tax); effective for transferring appreciated assets
Complex to set up and administer; grantor must be able to pay trust’s income taxes; requires experienced estate attorney
Quick Comparison
| Feature | Revocable | Irrevocable | Residence (QPRT) | IDGT |
|---|---|---|---|---|
| Removes assets from estate | ✗ No | ✓ Yes | ✓ Yes | ✓ Yes |
| You retain control | ✓ Full control | ✗ No | Retain use only | ✗ No |
| Avoids probate | ✓ Yes | ✓ Yes | ✓ Yes | ✓ Yes |
| Can be modified | ✓ Yes | ✗ Court order only | ✗ No | ✗ No |
| Income taxes on trust assets | Pass to grantor | Trust or beneficiaries | Trust or beneficiaries | Grantor pays (intentional) |
| Best for | Probate avoidance; incapacity planning | General estate reduction; asset protection | Highly appreciated real estate | Large estates; appreciated asset transfers |
Professional Guidance Is Essential
For every high-net-worth household, estate planning will involve some taxes. By using trusts strategically, you can reduce your overall estate tax liability and maximize the legacy you leave. Trusts can be highly effective under the right circumstances and for the right assets, but they require careful planning, precise legal drafting, and ongoing administration.
This is not a DIY domain. Mistakes in trust structure can result in assets reverting to your estate, unintended tax consequences, or family disputes. An experienced estate attorney working alongside a fiduciary financial advisor provides the coordinated approach these strategies require.
Estate planning intersects directly with retirement income planning. The structure of your accounts, the timing of distributions, beneficiary designations, and trust arrangements all interact with each other and with your tax situation. A fiduciary financial advisor can help coordinate the financial planning dimension before you engage an estate attorney. Contact us for a free, no-obligation consultation.