Many believe that once they set up and fund a revocable living trust, property held in the trust will completely avoid federal estate taxes after they die. In reality, a Revocable Living Trust (RLT) does not exactly provide any unique estate tax avoidance strategies.
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 (meaning spouses may transfer unlimited amounts of money to each other without incurring any taxes), while the charitable deduction permits tax-free transfers to qualifying charitable organizations (meaning all gift to charity are done tax free, no matter the amount). 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 Grantor (sometimes known as the trustmaker) or the Grantor’s RLT have combined assets exceeding this amount, there will likely be no federal estate tax due at a Grantor’s death. However, for purposes of this article, we will assume that the Grantor’s assets owned individually and in the revocable trust are valued at more than the lifetime exclusion amount.
Caution: If you live in a state with a state estate tax, you 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. Fortunately for Texas readers, Texas has no separate estate tax to consider.
Single Grantors and Estate Tax
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 Grantor’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 beneficiaries are your children, your brothers and sisters, your nieces and nephews, your 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 remaining estate. Otherwise, any property distributed to qualifying charitable organizations through the trust passes free from federal estate tax.
For Example: You as a Grantor are a single divorced person and have an estate valued at $20 million when you pass away. Since you have no spouse, you are unable to use the unlimited marital deduction as part of your estate plan. Estate tax will be incurred on anything above the $13.99 million dollar amount ($6.01 million).
In order for you to avoid paying estate taxes, an experienced estate planning attorney would discuss making some charitable gifts, either during your lifetime or upon your death. This attorney would advise to gift $6.01 million or just a little more to charity, which can be made tax free. Thereby bringing your taxable estate down below the $13.99 million mark. The remaining money may then be given away to your children, grandchildren, friends, and loved ones without incurring estate taxes on your passing.
Married Grantors and Estate Tax
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 trust that pass to your US citizen spouse after your 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 your spouse’s benefit.
On the other hand, if you are married and you create and fund a revocable living trust and name both your spouse and your children as current beneficiaries after you die, the portion of the trust passing to your spouse (utilizing the unlimited marital deduction) will likely not be subject to federal estate tax, and the portion passing to your children may be subject to estate tax (depending on the value of the assets and the federal lifetime exclusion amount available to you when you pass). If you include one or more qualifying charitable organizations as beneficiaries, the portion passing to the charities will likely not be subject to estate tax.
For Example: You and your spouse have an estate worth $29 million dollars and you wish to build an savvy estate plan. Remember, the $13.99 million if the lifetime exemption for each person (meaning husband and wife may each give away this much).
Upon your spouse’s passing, they may give you all the money they have (say $19 million). Using the unlimited marital deduction, this transfer does not incur estate taxes. You may also use a power tool, known as the Decease Spoused Unused Exclusion (DSUE), to double up on the exemption.
Meaning, after your spouse passes, you may elect to use the $13.99 they didn’t need and add it on top of your exclusion amount (this would give you $27.98 million to give away before you begin to incur estate taxes). You could then make a charitable gift of the extra $1.02 million in the estate to ensure you are taking full advantage of the lifetime exemptions and the charitable gifting deductions.
Do You Need a Revocable Living Trust?
If a revocable living trust does nothing to reduce your federal estate tax bill that cannot be done by holding the assets in your own name, why should you consider setting one up? There are at least three good reasons:
- To avoid probate. Assets held in your revocable living trust at the time of your death will avoid the court proceeding known as probate. Depending on your state of residence at the time of your 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 you become unable to manage your affairs while you are still alive, the successor trustee you name in your revocable living trust will be able to manage trust assets for your benefit 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 your state of residence.
- To keep your final wishes private. A revocable living trust is a private agreement that remains private after you die. 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 your named beneficiaries. Usually, this document is not required to be filed with the court, which will prevent strangers from knowing what you own and how you want what you own 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 and your loved ones, call us. Nielsen Law PLLC provides family-focused estate and business planning to individuals and families in Austin, Round Rock, Cedar Park, and the Central Texas area. For more information, and to learn about our firm, please contact us. We look forward to working with you.
