A living trust does not automatically avoid estate taxes. This is because the assets in a living trust are still considered part of your estate for tax purposes. Certain types of trusts can be structured to minimize estate taxes, but a standard revocable living trust does not provide these tax benefits.
Understanding Taxes with a Living Trust
If you are subject to estate taxes, a living trust can help you avoid the amount owed. Estate tax planning involves two fundamental principles: the so-called “unlimited marital deduction“ and the “unified estate tax credit.” A married person may leave unlimited amounts of assets to a surviving spouse without estate tax using the unlimited marital deduction. As to assets distributed to someone other than a surviving spouse, there is a unified estate tax credit that shelters from estate taxation a specified amount of value each person gives outright or in trust. Congress has been increasing the amount of the credit over time, but a future Congress may freeze or lower the credit.
For many years prior to 2013, living trusts for married couples were designed with estate tax in mind. Attorneys wrote living trusts in a way that each spouse took maximum advantage of their separate unified estate tax credits before applying the unlimited marital deduction to the balance of their taxable estate.
Living trust planning and design changed in 2013 when the American Taxpayer Relief Act of 2012 went into effect and then again with the 2017 Tax Cuts and Jobs Act. The 2012 estate tax law added the concept of portability, which makes it easier for a surviving spouse to elect to carry forward and apply any unused unified tax credit of the first spouse to die. Portability of the unified credit is available to a surviving spouse regardless of living trust design and trust provisions.
In 2017, Congress increased the unified credit exemption. Unified credit portability and the increased amount of the unified estate tax credit decrease the importance of estate tax planning for most families.
What are Current Unified Credit Limits?
As of 2024, each U.S. citizen can transfer estate and gift tax-free approximately $13 million, and a married couple has a combined unified credit of approximately $26 million (these amounts will increase with inflation). With the larger federal estate tax exemption and portability, most couples are not concerned about the federal estate tax.