Does a Revocable Living Trust Reduce Your Federal Tax Liability?
Some folks think that once they establish and fund a revocable living trust, the assets in the trust will avoid federal estate taxes after they die. But is that true? In reality, a living trust doesn’t provide any special solution for avoiding federal estate taxes.
The best way to reduce your estate taxes is via the unlimited marital deduction and the charitable deduction. These apply whether assets are held in a trust or owned directly by an individual. The unlimited marital deduction allows assets to be transferred to a U.S. citizen spouse without incurring the federal estate tax. Meanwhile, the charitable deduction allows tax-free transfers to qualifying charitable organizations. Such deductions are not exclusive to living trusts and can be implemented within a trust-based estate plan to ensure tax-efficient asset distribution.
Before you consider estate tax planning, it’s important to understand that estate taxes only apply when the value of assets that are gifted during the person’s life at their death exceeds a specific threshold. This threshold is known as the federal lifetime exclusion amount, which is $13.99 million in 2025. So, unless the total assets in the revocable living trust exceed this amount, no federal estate tax would be owed at the time of their death.
Estate taxes for single trustmakers
The two primary strategies for reducing your federal tax liability are available to single individuals only through the charitable deduction. This deduction allows any assets in a person’s trust that is left to qualifying charitable organizations to be excluded from their taxable estate. On the other hand, assets that were left to noncharitable beneficiaries will likely be subject to federal estate taxes if the total estate exceeds the federal exemption. For that reason, if your beneficiaries include children, siblings, nieces, nephews, friends, other trusts, or even a business, the property they inherit could be subject to estate taxes, depending on the size of your estate. Assets that were distributed to charitable organizations, however, are exempt from federal estate taxes.
Estate taxes for married trust makers
Married couples can benefit from the charitable and unlimited marital deductions. The charitable deduction operates as described above for single individuals. The unlimited marital deduction allows all assets transferred from a trust to a spouse in the U.S. to be free from estate taxes, provided the assets pass either directly to the spouse or are held in a special trust for the spouse’s benefit.
Married individuals who create and fund a revocable living trust, the portion of the trust that passes to the surviving spouse will likely be exempt from estate taxes, while the portion that passes to children could still be subject to the estate tax, depending on the size of the estate and available exemptions. If charitable organizations are named as beneficiaries, the assets funneled to them will usually pass free from the estate tax.
Talk to a Virginia Beach Trusts and Estates Attorney Today
The Law Office of Angela N. Manz represents the interests of Virginia Beach residents who are looking to create an estate plan. Call our Virginia Beach estate planning lawyers today to schedule an appointment, and we can begin discussing your next steps right away.
