Question:

Are assets in irrevocable trusts subject to the estate tax? (That’s “e” state not state tax). If so, does that mean both the grantor of the trust and the trust itself each has the federal (and state) estate tax exemptions?

Response:

It depends on how the trust is written. If it is a “grantor” trust for tax purposes, it will be in the grantor’s estate upon his death, and if it’s a “non-grantor” trust it probably won’t be. Many trusts are written with the intent to keep them in the grantor’s estate in order that property in the trust get a step-up in basis upon the grantor’s death. This is often the case in trusts used for asset protection or Medicaid planning purposes. Two common ways to keep the property in the grantor’s estate are for the grantor to retain an income interest or a testamentary power of appointment.

Other trusts are written to remove property out of a grantor’s estate. This is the case with irrevocable life insurance trusts. In these cases, the trusts are designed to be completed gifts when funded and a gift tax return may be due at that time. (Though to confuse things further, in the case of life insurance, trusts’ use of a Crummey power can eliminate the need to file a gift tax return.)

In either case, whether or not the trust is in the grantor’s estate, the trust doesn’t file an estate tax return. The funds in the trust just may or may not be included in the return filed by the estate of the deceased grantor.

 

Related Articles:

Does Your State Have Estate or Inheritance Taxes?

Will Distributions from Our Parents’ Trust be Taxed?

Will Property in an Irrevocable Trust with a Power of Appointment Receive a Step-Up in Basis?

What’s a “Step-Up” in Basis and Why Would You Want It?

What is Probate Property and What Isn’t?