Does a Revocable Trust Help With Estate Tax Liability?

revocable trust and estate tax

Estate taxes can significantly reduce the value of an estate, leaving heirs with less than they expected.

A revocable trust is a popular estate planning tool that many people use to avoid probate and ensure that their assets are distributed according to their wishes. But can a revocable trust also help with estate tax liability?

We’ll explore the relationship between a revocable trust and estate taxes, whether or not using a revocable trust can reduce your estate tax liability, and how a Cinnaminson trust lawyer can help you set up a trust that works best for your needs.

Estate Planning With Trusts

Estate planning is essential for anyone who wants to ensure that their assets are distributed according to their wishes.

While many people know the need for a will, a trust is also a useful estate planning tool. Trusts can be effective for individuals with complex family situations, high net worth, or charitable giving goals.

A trust is a legal arrangement in which the creator—or “grantor”—transfers assets to a trustee who manages them on behalf of the trust beneficiaries. Trusts can help individuals manage their assets, minimize taxes, avoid probate, and ensure their wishes are fulfilled after they pass away.

There are several types of trusts, each with its benefits and drawbacks, and the best approach will depend on the individual’s specific circumstances and goals.

What Is a Revocable Trust?

A revocable trust is an arrangement in which the grantor retains the right to modify or revoke the trust during their lifetime. Upon the grantor’s death, the revocable trust becomes irrevocable and the assets in the trust are distributed to the beneficiaries according to the terms of the trust.

One of the primary benefits of a revocable trust is that it allows assets to pass to beneficiaries without going through probate, which can be a lengthy and expensive process.

What Is Estate Tax?

Estate tax—also known as inheritance tax—is a tax imposed on the transfer of assets from deceased individuals to their heirs.

The federal estate tax applies to estates with a value above a certain threshold, which in 2023 was set at $11.7 million for individuals and $23.4 million for married couples. Some states also impose their own estate or inheritance taxes with their own thresholds and rates. New Jersey, however, repealed its estate tax in 2018.

How Is Federal Estate Tax Calculated?

The federal estate tax is calculated based on the value of the assets in the estate. Assets subject to federal estate tax include cash, investments, real estate, and personal property like jewelry and artwork. Life insurance proceeds are also included in the estate if the deceased individual owned the policy at the time of death.

The estate tax is calculated using a progressive rate structure, with higher rates applying to larger estates. For 2023, the top estate tax rate is 40%.

The Impact of Estate Taxes on Heirs

Estate taxes can significantly impact the value of an estate and the amount of money heirs receive after their loved one’s death.

For estates that exceed the exemption threshold, the tax can be substantial, reducing the estate’s value by millions of dollars. This can leave heirs with less than expected and may even force them to sell assets to pay the tax bill.

Can a Revocable Trust Help With Estate Tax Liability?

A revocable trust does not provide any direct tax benefits in reducing estate tax liability. Since the grantor retains control of the assets in the trust during their lifetime, those assets are included in their estate and subject to estate tax when the grantor dies.

However, a revocable trust can be a useful estate planning tool in other ways that indirectly reduce estate tax liability.

For example, by avoiding probate, a revocable trust can help reduce the costs and fees associated with settling an estate. This can preserve more of the estate’s value for the heirs and may also reduce the size of the estate, which in turn could lower the estate tax liability.

Additionally, a revocable trust can provide more flexibility and control over how assets are distributed after death. This can be particularly beneficial for individuals with complex family situations or those who want to leave assets to charity.

Irrevocable Trusts and Estate Tax

While a revocable trust does not provide direct tax benefits, an irrevocable trust can reduce estate tax liability. Unlike a revocable trust, the grantor cannot modify or revoke an irrevocable trust. Once assets are transferred to the trust, they are no longer considered part of the grantor’s estate for tax purposes.

By transferring assets to an irrevocable trust, the grantor can remove them from their estate and reduce the estate tax liability. However, this strategy requires careful planning and consideration, as once the assets are in the trust, the grantor no longer has control over them.

Gift Tax and Estate Tax

Another way to reduce estate tax liability is through gifting.

The federal gift tax applies to gifts above a certain threshold, currently $15,000 per year per recipient. Gifts above this amount are subject to gift tax, although several exemptions and exclusions can be used to reduce or eliminate the tax.

Gifting can be an effective strategy for reducing estate tax liability, as it reduces the size of the estate by transferring assets to heirs during the grantor’s lifetime. However, like with irrevocable trusts, this strategy requires careful planning and consideration to ensure that it is done in a tax-efficient manner.

Estate Planning Strategies to Reduce Estate Tax Liability

Several estate planning strategies can be used to reduce estate tax liability, including:

  • Irrevocable trusts
  • Gifting
  • Charitable giving
  • Life insurance trusts
  • Family limited partnerships

Each strategy has advantages and disadvantages; deciding which to add to your estate planning checklist will depend on the individual’s specific circumstances and goals.

Need Help Reducing Your Estate Tax Liability? Contact a Cinnaminson Estate Planning Attorney Today

Estate tax can significantly impact the ultimate value of an estate and the amount of money heirs receive. While a revocable trust does not provide direct tax benefits, it can be a useful estate planning tool for avoiding probate, providing flexibility, and giving you control over how assets are distributed.

A Cinnaminson estate planning lawyer can help you develop strategies such as irrevocable trusts, gifting, and charitable giving that can be used to reduce estate tax liability.

If you need help with estate taxes, planning for the future, and securing your loved ones’ futures, contact us today at The Simone Law Firm.

Author Bio

michael s. simone, esq.

Michael Simone is the Founder and Managing Partner of the Simone Law Firm, an estate planning law firm in Cinnaminson, NJ. With more than 20 years of experience in criminal defense, he has represented clients in a wide range of legal matters, including estate planning, elder law, probate, real estate, and business law.

Michael received his Juris Doctor from the Rutgers University School of Law and is a member of the New Jersey Bar Association.

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