Reducing Your Estate Tax Burden with Trusts

Residents of Summit, New Jersey who have substantial or high-value estates should be aware of the federal estate tax threshold, and the ways in which it may be possible to reduce the estate tax burden. The Internal Revenue Service provides the threshold amount for the estate tax each year, which means that if your estate exceeds the threshold amount, then estate tax may need to be paid. The threshold amount increases annually, and in 2025, it is set at $13,990,000. That value includes your gross estate, which can be increased by any adjusted taxable gifts.

For anyone whose estate may be near the threshold, it is important to consider options for reducing the total amount of your estate for purposes of reducing your estate tax burden. One way that you may be able to do this is by the creation of one or more types of trusts. In order for assets transferred to a trust to be outside the calculation of your total estate value, the trust will need to be irrevocable. The following are some of the common types of asset-protection trusts that are established to reduce a person’s estate tax burden.

Intentionally Defective Grantor Trust

An intentionally defective grantor trust (IDGT) has a name that might make it seem unappealing, but it is actually a type of trust that can be very useful for reducing estate taxes. This is a particular type of irrevocable trust that is designed to hold assets that appreciate over time, like securities or real property. For taxation purposes, the grantor (the party who creates the trust) pays taxes on the appreciation of the assets held by the trust, but the assets are not included in the grantor’s estate (and as such are not included in the estate total for determining estate tax liability).

Qualified Personal Residence Trust

A qualified personal residence trust (QPRT) allows you to transfer your residence (and up to two residences) into this type of trust, and the value of the residences is not included as part of your estate for estate tax determinations. However, this type of trust has specific requirements, including the amount of time that you can reside at one of the residences without owing fair market rent. A lawyer can explain how the time period of your residence must expire during your lifetime so that the assets are transferred to beneficiaries before your death.

Irrevocable Life Insurance Trust

You can also establish an irrevocable life insurance trust (ILIT) to hold the value of your life insurance policy or proceeds so that they are not included in the total value of your estate for purposes of estate tax.

Contact a Summit, New Jersey Estate Planning Attorney

Do you want to find out more about options for reducing the total value of your estate for purposes of avoiding the federal estate tax? Trusts are one option, but others may also be available to you. It is important to discuss your financial circumstances with one of the experienced Summit estate planning attorneys at Dempsey, Dempsey & Sheehan. We can provide you with more information about your options, and we can assist you with the creation of trusts and other estate planning tools in New Jersey.

Sources:

irs.gov/businesses/small-businesses-self-employed/estate-tax

law.justia.com/codes/new-jersey/title-3b/