Do you think that the present federal estate tax exemption ($13.99 million for individuals and $27.98 million for married couples in 2025) eliminates the need for estate planning? Well, reconsider that thought. Even with this large exemption, there are still a lot of advantages to setting up a living trust, particularly if you want to keep your privacy and avoid probate.
Here are some answers to questions you may have about this estate planning tool.
What’s a living trust?
A living trust — also known as a revocable trust, grantor trust or family trust — is a legal entity that holds ownership of your assets during your lifetime and distributes them according to your instructions after your death. Unlike a will, a living trust allows your estate to bypass probate, which is the often lengthy and public court process of settling an estate.
How does a living trust work?
You begin by creating a trust document and transferring ownership of specific assets to the trust. These may include:
- Your primary residence
- Vacation properties
- Valuable personal items like antiques
After your passing, you will designate a trustee to oversee and allocate the assets. If you are still living and able to legally act, you may act as the trustee. A successor trustee, such as a dependable friend, relative, lawyer, certified public accountant, or financial institution, may then be appointed.
Because a living trust is revocable, you can amend or cancel it at any time during your lifetime.
What are the tax implications?
For federal income tax purposes, the IRS doesn’t treat the living trust as separate from you while you’re alive. You’ll continue to report all income and deductions from the trust’s assets on your personal tax return.
State law, however, acknowledges the trust as a distinct legal body. When set up correctly, this helps to guarantee a more discreet and effective distribution of your assets by avoiding probate.
Upon your death, assets in the trust are generally included in your estate for federal estate tax purposes. However, any assets passed to a surviving spouse who’s a U.S. citizen qualify for the unlimited marital deduction, which exempts them from estate tax.
It’s also important to note that the current high federal estate tax exemption is set to expire at the end of 2025, unless Congress extends it. Under “The One, Big, Beautiful Bill,” which recently passed the U.S. House of Representatives, the federal gift and estate tax exemption would be increased to $15 million per individual in 2026. This amount would be permanent but annually adjusted for inflation. The bill is now being considered by the Senate. Keep in mind that the pending legislation could change.
Are there any common pitfalls to avoid?
While a living trust is a powerful tool, it’s only effective when properly executed. Here are some common mistakes to avoid:
- Outdated beneficiary designations. Your trust is superseded by the beneficiaries listed on brokerage accounts, life insurance policies, and retirement accounts. Verify that your designations complement your estate strategy as a whole.
- Jointly owned property. Real estate held as “joint tenants with right of survivorship” automatically passes to the surviving co-owner, regardless of what your trust says.
- Failing to transfer assets. Simply creating a trust isn’t enough. You must formally transfer ownership of assets to the trust. Failing to do so means those assets may still be subject to probate.
When is more planning needed?
A living trust does not lower estate or inheritance taxes, even though it helps avoid probate. Additional methods (such irrevocable trusts, charity giving, or gifting) would be required if your assets exceed the current exemption or if state estate taxes are applicable.
Not a one-size-fits-all solution
A living trust is an estate planning tool that can simplify the transfer of your assets, protect your privacy and avoid probate. However, it’s not a one-size-fits-all solution. To make the most of your estate plan and stay ahead of changing tax laws, consult with a Wegner CPAs advisor or a trusted state planning attorney.
