What Is an Estate Tax?

The estate tax is a “transfer tax,” like capital gains or income taxes. So, if your parents die and you inherit their holdings, your inheritance could now be impacted by the estate tax as you didn’t hold the assets before their death.

However, the estate tax only applies to estates worth more than the current IRS cap (adjusted to inflation). During the 2023 tax year, the IRS estate tax cap was triggered on any estates worth more than $12.92 million for individuals and $25.84 million for couples. In 2024, this increased to $13.61 million and $27.22 million, respectively.

As your knowledgeable estate planning lawyer will explain, there is a crucial and usually unknown distinction regarding estate tax; all the assets above the estate tax cap do not impact the assets below the cap.

So, if your estate is worth $12.92 million (or less), you will not pay taxes on those funds. But, if your estate is worth $17 million, you will pay no taxes on the first $12.92 million. The only vital question is whether your estate pays taxes on the assets above that cap.

Another critical difference between an estate tax and most other transfer taxes is that the tax is paid by the payer and not you, as the recipient. So, when you die and leave a large estate to your heirs, the estate would pay the taxes owed to the IRS. This could severely impact the amount your family and beneficiaries receive after death.

That said, you and your experienced, knowledgeable, and compassionate estate planning lawyer must see that the estate transferred remains, if possible, under the IRS cap; trusts are one potential tool that can help you achieve that goal.

What Types of Trust Can Help Me Avoid Estate Taxes?

First, one of the most common forms of trust is the revocable, or “living,” trust. You set up this trust during your life and fully control the trust and its assets. You can add and remove assets, change beneficiaries, etc.

Revocable trusts have numerous uses and can be especially helpful to avoid probate issues upon your death.

However, a revocable trust is not usually the answer if you’re looking for help avoiding or reducing your estate tax.

Another prevalent type of trust is irrevocable trust. Once drafted, this trust becomes irrevocable, and you lose complete control over any of the assets you include in it.

You detail precisely who will benefit from the trust, how it will be managed and distributed, and what assets it includes.

That said, you can still add additional assets over time, but once it’s finalized, the irrevocable trust cannot be changed without a court order.

The legal advantage it provides is that when you put assets into an irrevocable trust, they are “removed” from your estate. The assets named in the trust now legally belong to the trust and are no longer with you.

So, by transferring these assets in an irrevocable trust, you are not contributing to the total value of your estate, which, for a significantly large estate (that may reach or exceed the current IRS estate tax cap), you can essentially protect these assets from excessive estate taxes.

Every case differs, however, and none of these matters should be considered without obtaining an Indiana estate planning lawyer’s professional, empathetic, and experienced advice and guidance

What is a Residence Trust and It Lower or Mitigate My Estate Tax?

A residence trust is simply another type of irrevocable trust and is usually used to shield specific assets from estate taxes.

For example, you wish to shield your family home from estate tax. One strategy would be to put your house into the trust’s name and then list yourself and your heirs as the trust’s beneficiaries. In most cases, this would allow you to continue living in your home and let your heirs live there when you die. The trust owns the property; however, you and your heirs can still use it.

The residential trust holds the property, and no asset is left to tax. There are many reasons to use a residential trust, but it is beneficial if most of your family’s wealth is tied up in the family home. So, even though you and your family continue to live in the house, you don’t own it, so there would commonly be no estate tax issue with the IRS.

What Are Some Other Advantages of Setting Up a Trust?

If you are a high-net-worth household, professional estate planning can solve many tax (and other) issues, but usually, you still may have to pay some taxes.

However, following the advice and experienced guidance of an Indiana estate planning lawyer, you can usually strategize your way out of and around significant tax liability.

If the right circumstances prevail, different types of trusts can be significantly helpful; however, they require extensive professional planning.

A qualified personal residence trust (or QPRT) is a valuable and precise legal tool that can be highly beneficial if you wish to transfer your residence to your heirs while significantly minimizing the gift and estate taxes they’ll have to pay.

This transfer of your family home is considered a gift to your heirs, and the value of the gift is equal to the amount of your home.

However, as in most legal matters, many rules and regulations apply. For example, it’s critical to note that you (as the trust’s grantor) must outlive the trust’s term. If the grantor does not survive, the property may revert to being part of your taxable estate, valued at its current market value.

Your professional estate planning lawyer will know ways to reduce the risk, for example, by using multiple QPRTs, one for each spouse. This significantly reduces the chances of your primary residence being moved back into your taxable estate, thus increasing its value significantly.

I Need Help Avoiding Estate Taxes; How Should I Proceed?

As stated, all estates and the estate plans drafted to protect them differ. Therefore, the main job that your skilled, experienced, and thorough estate planning lawyer has is to find the best legal solutions that fit your unique needs.

Therefore, the prudent and rational path is to consult a highly skilled and qualified estate planning lawyer, analyze your entire estate, and then strategize what estate planning tools, including a QPRT, fit your needs.

The knowledgeable, empathetic, and well-versed estate planning lawyers at Beeman Heifner Benge, P.A. have assisted numerous Anderson clients in finding suitable options to protect their assets and families upon their death.

Call them today for a free evaluation of your case at 765-684-4355 and get the peace of mind that comes with having experienced, caring, highly qualified professionals to help secure your family’s and heirs’ future.