People who have millions of dollars in property may worry about taxes after they die. Estate taxes can substantially reduce the overall value of an estate by diverting resources to federal coffers.
There are numerous ways for people to plan for the possibility of estate taxes. An irrevocable trust is a powerful tool for those whose property could be subject to taxes.
How do irrevocable trusts work?
The amount owed in federal estate taxes depends on the total value of an estate. First, the estate must be large enough to trigger federal taxes. Next, the amount that the estate exceeds the current exemption allowed by the federal government determines the tax rate that applies.
Irrevocable trusts help limit estate taxes by diminishing the overall value of an estate. The property transferred to the irrevocable trust is not part of the estate and does not pass through probate court.
In some cases, irrevocable trusts that hold real estate, financial accounts and even businesses can prevent an estate from exceeding the exemption threshold, thereby allowing families to fully bypass estate taxes. Other times, the property transferred to the trust diminishes the value of the estate enough to keep the federal estate tax rate as low as possible.
The federal estate tax exemption changes frequently, so those with valuable assets may need to review their wills every few years to ensure they have protection. For those who die in 2026, $15 million is the threshold for federal estate taxes.
Reviewing property and tax concerns with an estate planning attorney can help people choose the right tools. Irrevocable trusts are helpful for those who are likely at risk of substantial estate taxes without proper planning.
