How to minimize estate taxes using trusts

With the passage of the One Big Beautiful Bill Act, or OBBBA, the federal estate tax exemption was permanently increased beginning in 2026. However, higher exemption amounts won't necessarily eliminate estate tax exposure for many families. Strategic use of trusts may help your heirs keep more of the assets you've worked to grow and protect over your lifetime.

Trusts come in different varieties with different provisions, so it's helpful to familiarize yourself with strategies that are specifically designed for individuals with large estates. There are several trusts that are commonly used to pass wealth in a tax-efficient manner by shifting assets out of an individual's taxable estate.

What is the current estate tax exemption?

An estate tax is a levy charged by the federal government and some state governments on property that's part of your estate upon your death. The 2026 estate tax exemption is $15 million for individuals and $30 million for married couples. Only assets in excess of these amounts are subject to a federal estate tax, which ranges from 18% to 40%, depending on the amount exceeding the threshold.

For example, if an individual's estate is valued at $16 million, only the amount over $15 million—or $1 million—would be subject to this tax under current federal tax policy. This assumes none of the individual's estate tax exemption was used during their lifetime.

In addition to the federal estate tax, 12 states and the District of Columbia impose estate taxes, and five states have inheritance taxes. Maryland is the only state that levies both an estate and inheritance tax. The exemption thresholds and rates for these taxes vary widely but are easily accessible via the Tax Foundation's estate and inheritance tax tool.

Will estate tax laws change?

For the past 8 years, many estate planning conversations have focused on whether the higher estate tax exemption created under the Tax Cuts and Jobs Act of 2017, or TCJA, would sunset after December 31, 2025. Prior to the TCJA, the exemption was $5.49 million per individual. In 2025, it was $13.99 million.

In July 2025, however, Congress passed the OBBBA, repealing the sunset and increasing the federal estate tax exemption beginning in 2026. The legislation retains annual inflation adjustments going forward. The new law creates clarity and certainty for families as they implement their estate planning.

Elevated inflation and sustained market growth in recent years have significantly increased the value of many estates. Furthermore, appreciating assets like closely held businesses and real estate can push an estate above exemption thresholds faster than expected. This is why individuals who don't meet the current threshold may want to consider strategies that help protect their estate from taxes.

Who pays the estate tax?

In general, estate tax payments are paid by the estate before assets are transferred to beneficiaries. However, the law allows for a tax-free distribution of assets to US citizen spouses through the unlimited marital deduction. If you leave everything to your spouse, after you pass away, estate taxes would typically be deferred until their death.

Planning for tax-free transfers may be more complicated for a blended family, requiring the guidance of a financial professional.

Using trusts to reduce estate taxes

Trusts can be used for a variety of purposes, from charitable giving to providing for a loved one with special needs. Irrevocable trusts help reduce estate taxes because the assets placed in the trust are excluded from your estate.

Irrevocable means you can't reclaim its assets once a trust is established and funded. In contrast, revocable trusts allow you to move assets in or out.

Several types of irrevocable trusts are frequently used to maximize transfer tax efficiency. These include irrevocable life insurance trusts, grantor retained annuity trusts, qualified personal residence trusts and spousal lifetime access trusts.

Irrevocable life insurance trusts

An irrevocable life insurance trust, or ILIT, is established to own and control a new or existing life insurance policy. When the insured individual—typically the grantor of the trust—passes away, the trust collects the death benefit and distributes it according to the terms set in the trust document.

When it comes to irrevocable life insurance trusts, there are a few caveats to consider.

• The grantor typically must provide funds for the trust to pay policy premiums. These transfers may be subject to gift taxes if the value exceeds the annual gift tax exclusion.
• Some allow the trust to fund the premium payments by transferring an income-producing asset to the trust. However, the asset would be considered a gift, possibly subject to gift taxes.
• If ownership of an existing insurance policy is transferred, a 3-year look-back rule requires the grantor to survive the time frame to avoid it being included in your estate.

Several types of life insurance are available with provisional riders that provide additional benefits. A life insurance professional can help you evaluate options and offer guidance.

Grantor retained annuity trusts

When you establish a grantor retained annuity trust, or GRAT, you retain the right to receive annuity payments from the trust for a set period—or for the rest of your life. These payments are calculated based on IRS rates and life expectancy tables.

When the trust expires, its beneficiaries receive the remaining assets. If you pass away before the trust expires, however, the assets will revert to your estate as though the GRAT never existed. This risk makes it important to select a trust term you'll likely outlive.

There are some additional opportunities to optimize tax savings with GRATs or lower the longevity risk—including creating a joint trust with a spouse, funding a trust with fractional interests in your property or structuring short-term trusts to reduce the gift tax to zero. It's important to work with a wealth planner to illustrate all possible strategies.

Qualified personal residence trusts

By transferring ownership of your home to a qualified personal residence trust, or QPRT, you can remove your home—as well as any future appreciation in the property—from your estate. Although you'll no longer own the home, you can continue living there for the term of the trust. The ability to continue to reside in the home for a limited time reduces the gift tax on the trust.

At the trust's term, the home will pass to your beneficiaries with no further gift or estate tax obligation regardless of the property's appreciation. However, like with a GRAT, you must outlive the trust term or the QPRT is ignored and the home is included in your estate.

Tax impact for heirs

With a QPRT, your heirs won't receive a step-up in basis to market value at the time of inheritance. As a result, they may owe more capital gains tax if they decide to sell the property.

Typically, when your heirs inherit a home at your death, they receive a step-up in basis equal to the fair market value at the time of your death or 6 months after. If they choose to sell the home, there would be little or no capital gain on the sale. A gift through a QPRT, however, transfers your basis in the home to your beneficiaries. You and your wealth planner can compare the benefits of a reduced gift tax at 40% versus capital gains tax at 20% and select the appropriate strategy.

During the QPRT term, the grantor is considered the owner for income tax purposes, preserving the $250,000/$500,000 capital gain exclusion if the home is sold during the trust's term.

New reporting requirements

Beginning March 1, 2026, transfers of residential property to certain trusts, limited liability companies and other entities may trigger federal reporting requirements with the Financial Crimes Enforcement Network, or FinCEN. Noncompliance may result in significant penalties. If you're considering transferring a home to a trust, it's important to coordinate with your legal and financial professionals to ensure proper reporting.

Spousal lifetime access trusts

Married couples can consider a spousal lifetime access trust, or SLAT, which is an irrevocable trust that can reduce estate tax liability while retaining access to trust assets by a surviving spouse and other beneficiaries. SLATs are often created as a hedge to access the assets when implementing an irrevocable trust.

Beyond minimizing estate taxes, there are other reasons to establish a trust. Learn more about these trust strategies and their benefits so you can get you closer to reaching your financial goals.

Dynasty trusts and the impact of trust jurisdiction

For high-net-worth individuals wondering how to minimize estate taxes, the state law that governs your trust can be an important consideration. Certain states like Delaware are widely recognized as trust-friendly states, offering legal frameworks designed to maximize flexibility, asset protection and tax efficiency.

• Dynasty trusts: These are designed to hold assets for multiple generations without triggering estate taxes at each transfer. Assets placed in the trust are generally removed from your taxable estate and can continue growing over time.
• Delaware Asset Protection Trusts: These are a type of self-settled irrevocable trust where its structure allows you to transfer assets out of your taxable estate while potentially retaining limited access to trust distributions.

Whether used alongside an ILIT, GRAT or another irrevocable trust strategy, a trust's governing state can influence how it operates over time. In some cases, favorable state laws may also offer additional tax advantages. For example, certain states don't impose income tax on trust income accumulated for beneficiaries who live outside the state.

Because state tax laws and regulations can change, it may be worth reviewing which state laws apply in your situation. Working with an experienced corporate trustee, such as First Citizens Delaware Trust Company, can help ensure your trust is aligned with your long-term goals.

The bottom line

While the OBBBA permanently raised the federal estate tax exemption, your estate could still be subject to transfer taxes. Elevated inflation, sustained market growth and appreciating assets like closely held businesses and real estate can cause your estate to exceed exemption limits.

If you're wondering how to minimize estate taxes, speak with a wealth planner about which irrevocable trusts or other planning strategies can help you achieve your broader, long-term goals.