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Trusts can play an important role in reducing estate taxes, but the tax benefits depend on how the trust is structured. For 2026, the federal estate tax exemption is $15 million per person, with some states imposing estate taxes at much lower thresholds. Certain irrevocable trusts can move assets or future appreciation outside of a taxable estate, while revocable trusts generally can’t. Choosing the right strategy means weighing potential tax savings against tradeoffs involving level of control, access to assets and long-term wealth-transfer goals.
A financial advisor can help you evaluate how trusts, gifting and other estate-planning strategies may affect your taxable estate and broader wealth-transfer plan.
How the Estate Tax Works
The federal estate tax applies to taxable wealth transferred at death beyond an individual’s available exemption. For 2026, the federal estate and gift tax exemption is $15 million per person, with the top estate tax rate set at 40%.
Married couples can potentially protect up to $30 million through their combined federal exemptions. Under portability rules, a surviving spouse can use a deceased spouse’s unused exemption if the estate makes a timely election, generally by filing IRS Form 706.
The IRS also allows individuals to give up to $19,000 per recipient in 2026 without using their lifetime gift and estate tax exemption, provided the gifts qualify for the annual exclusion. Married couples can generally give $38,000 per recipient through combined gifts.
Here’s how the major federal rules apply in 2026:
| Estate Tax Rule | 2026 Amount | What It Means for Estate Planning |
|---|---|---|
| Federal estate tax exemption | $15 million per person | Estates exceeding the available exemption may owe federal estate tax. |
| Married couple’s combined exemptions | Up to $30 million | Spouses can potentially combine exemptions through planning and portability. |
| Top federal estate tax rate | 40% | Taxable amounts above the available exemption generally face a 40% marginal rate. |
| Annual gift tax exclusion | $19,000 per recipient | Qualifying gifts generally don’t reduce the lifetime exemption. |
| Combined annual gift exclusion | $38,000 per recipient | Married couples can generally double the annual exclusion. |
State Estate Taxes
State estate taxes can create additional obligations, even when an estate owes no federal tax. Several states and the District of Columbia impose their own estate taxes, sometimes with exemptions far below $15 million. A smaller number of states impose inheritance taxes, which generally depend on the beneficiary’s relationship to the deceased and the value they receive.
For example, Oregon has a $1 million estate tax threshold, with marginal rates ranging from 10% to 16%. 1 Consequently, families whose estates fall well below the federal exemption may still benefit from estate tax planning at the state level.
Why a Revocable Trust Doesn’t Cut Estate Taxes
A revocable living trust allows individuals to transfer assets into a trust while retaining the ability to change beneficiaries, withdraw property or terminate the arrangement. This flexibility makes revocable trusts useful for avoiding probate, maintaining privacy and managing assets during incapacity.
However, the IRS generally includes assets held in a revocable trust in the owner’s taxable estate because the owner retains control. Simply transferring a $5 million investment portfolio into a revocable trust, for example, doesn’t remove that $5 million from estate tax calculations.
Irrevocable trusts work differently. When properly structured, they can remove assets and their future appreciation from the grantor’s taxable estate. However, achieving this generally requires surrendering certain ownership rights and control over the transferred property.
It’s important to note that not every irrevocable trust automatically produces estate tax savings. Retained powers, beneficial interests and other provisions can cause assets to remain included in the taxable estate.
Trust Strategies That Can Reduce Estate Taxes
Several specialized trusts can reduce estate taxes by transferring ownership, removing future appreciation or taking advantage of available exemptions. The appropriate strategy depends on the assets involved, family circumstances and whether the primary goal is wealth transfer, charitable giving or providing for a surviving spouse.
Common strategies include irrevocable life insurance trusts (ILITs), spousal lifetime access trusts (SLATs), grantor retained annuity trusts (GRATs) and qualified personal residence trusts (QPRTs).
Charitable trusts and dynasty trusts serve different purposes, while credit shelter trusts can be particularly valuable for married couples in states with lower estate tax exemptions. A dynasty trust can also help manage the generation-skipping transfer (GST) tax, which generally applies to certain transfers benefiting grandchildren or more remote descendants.
Here’s an overview of some tax-reducing strategies to consider:
| Trust Type | How It Works | Who It May Fit | Main Tradeoff |
|---|---|---|---|
| Irrevocable life insurance trust (ILIT) | Owns life insurance and can keep death benefits outside the insured’s taxable estate | Wealthy individuals with substantial life insurance | Loss of policy control and funding requirements |
| Spousal lifetime access trust (SLAT) | One spouse transfers assets into a trust benefiting the other spouse | Married couples seeking access flexibility | Divorce, death and access risks |
| Grantor retained annuity trust (GRAT) | Grantor receives annuity payments while excess appreciation may pass to heirs | Owners of appreciating assets | Grantor mortality risk and investment underperformance |
| Qualified personal residence trust (QPRT) | Transfers a residence while retaining occupancy rights for a fixed term | Owners of valuable homes | Must survive the retained term for intended estate tax benefits |
| Charitable remainder trust (CRT) | Pays income to beneficiaries before transferring remaining assets to charity | Families with charitable goals and income needs | Remaining assets ultimately pass to charity |
| Charitable lead trust (CLT) | Pays charity first, with remaining property eventually passing to other beneficiaries | Philanthropic families transferring wealth | Charity receives income before heirs |
| Dynasty trust | Holds wealth across generations using available estate and GST tax exemptions | Families planning multigenerational transfers | Complexity, costs and limited access |
| Credit shelter trust | Uses a deceased spouse’s exemption to preserve assets for beneficiaries | Married couples, especially in estate-tax states | Reduced survivor flexibility and potential basis tradeoffs |
Example of How Trusts Can Lower a Taxable Estate
Trust planning becomes easier to understand when examining how different arrangements affect potential estate taxes. Bear in mind that the following hypothetical examples use simplified assumptions, exclude administrative costs and assume transfers satisfy the applicable tax rules.
Consider an unmarried individual with a $20 million taxable estate, including a $3 million life insurance death benefit. Without planning, the estate exceeds the 2026 federal exemption by $5 million.
Now suppose the individual establishes an ILIT that keeps the $3 million death benefit outside the taxable estate. Assuming the policy is properly owned by the trust and no estate inclusion rules apply, the taxable estate decreases to $17 million. Now, the estate would only exceed the exemption by $2 million, potentially resulting in $1.2 million in tax savings ($3 million x 40%).
| Calculation | Without ILIT | With ILIT |
|---|---|---|
| Estate value | $20 million | $17 million |
| Federal exemption | $15 million | $15 million |
| Amount above exemption | $5 million | $2 million |
| Estimated federal tax at 40% | $2 million | $800,000 |
| Estimated tax savings | — | $1.2 million |
This example assumes the full exemption remains available, no other deductions apply and the $3 million represents insurance proceeds rather than a separate policy value. Moving an existing policy into an ILIT can also trigger the three-year inclusion rule, emphasizing the importance of timing.
Bottom Line
Trusts can help reduce estate taxes for wealthy families and residents of states with relatively low exemption thresholds. However, the right approach depends on asset values, family goals, tax consequences and state law. A financial advisor working alongside an estate planning attorney can help model potential tax savings, evaluate the tradeoffs and identify a trust strategy that supports your wealth transfer goals.
Estate Planning Tips
- If you’re looking for help with the estate planning process, consider working with a financial advisor. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Estate planning can be complex, and that’s especially true if you’re someone with significant wealth. To make sure you have everything you need, read up on the essential estate planning tools for wealthy investors.
- Inheritance isn’t usually considered income, but certain types of inherited assets can have tax implications. Before you spend or invest your inheritance, read more inheritance taxes and exemptions.
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Article Sources
All articles are reviewed and updated by SmartAsset’s fact-checkers for accuracy. Visit our Editorial Policy for more details on our overall journalistic standards.
- “Form OR-706 Instructions Oregon Estate Transfer Tax.” Oregon.Gov, https://www.oregon.gov/dor/forms/FormsPubs/form-or-706-inst_104-001-1_2026.pdf. Accessed Oct. 23, 2026.