Trusts for Larger Estates

Grantor retained annuity trusts, intentionally defective grantor trusts, spousal lifetime access trusts: the names sound exotic, and they are often sold to people who do not need them. Yet for an estate that could owe estate tax, or that will keep growing for decades, these tools can move millions of dollars of future growth to heirs without tax. This chapter starts with the question that decides whether any of it applies to you, how big your estate is likely to be, then explains the main irrevocable trusts in plain terms, with what each costs you in control, flexibility and income tax.

First, check whether estate tax applies

In 2026 each person can leave $15,000,000 free of federal estate tax, after deducting debts and gifts to a spouse or charity. The One Big Beautiful Bill Act of 2025 set the exclusion at that level from 2026 and indexes it for inflation in later years, replacing a scheduled cut to roughly half. Above the exclusion the tax is 40%. A married couple can effectively double the exclusion through portability: the surviving spouse can use the unused exclusion of the first spouse to die, but only if the executor files an estate tax return (Form 706) to elect it, even when no tax is due.

Each year you can also give $19,000 to as many people as you like without using any of your exclusion or filing a gift tax return. Larger gifts use up part of the lifetime exclusion; tax is due only once the total exceeds it.

Two other taxes catch more families. About a dozen states and the District of Columbia have their own estate tax, several starting at a small fraction of the federal exclusion, and a few states tax inheritances instead. And the generation-skipping transfer tax applies to gifts to grandchildren and later generations above a separate exemption equal to the basic exclusion.

If your estate, including life insurance death benefits and expected growth, is well below these thresholds, the main reasons for the trusts below are control and protection, not tax. The estate tax calculator shows how close your estate is.

Freezing growth: why giving early matters

Every advanced technique below relies on one idea: estate tax is charged on what you own at death, so any growth that happens after an asset leaves your estate escapes it. The example shows how much growth that can be.

Assets worth $2,000,000 today, growing at an assumed 7.0% a year, are worth about $7,739,369 after 20 years. If they are given away or sold to a trust now, the $5,739,369 of later growth is outside your estate. If your estate is over the exclusion, each dollar of that growth would otherwise face tax of up to 40%.

Small, regular gifts work the same way on a smaller scale.

Giving $1,500 a month, which stays within one year's annual exclusion for one recipient, and investing it at an assumed 6.0%, builds about $680,158 after 20 years, none of it in the giver's estate and none of the exclusion used.

The trade-off is basis. Assets you give away keep your original tax basis, while assets you hold until death usually receive the step-up described in chapter 3. Gifting appreciated assets to save estate tax can therefore create capital gains tax for heirs, and when an estate is well under the exclusion, holding the asset until death is often better for the family's total tax.

The main irrevocable trusts

All of these trusts are irrevocable: once funded, you cannot simply take the assets back. That loss of control and flexibility is the real price, and it is why they suit people with more than enough to live on.

Irrevocable life insurance trust (ILIT). Life insurance death benefits count in your estate if you own the policy. An ILIT owns the policy instead, so the payout is outside the estate and can give heirs cash to pay estate tax or equalise an inheritance. A policy transferred to the trust within three years before death is pulled back into the estate, so new policies are often bought by the trust directly.

Grantor retained annuity trust (GRAT). You put assets into a trust for a set number of years and receive fixed annuity payments back. The payments are set so that, using an IRS interest rate called the section 7520 rate (published monthly), the gift to heirs is close to zero. If the assets grow faster than that rate, the excess passes to heirs free of gift tax at the end of the term. If they grow more slowly, the assets simply come back to you and little is lost except costs. You must survive the term for it to work, so terms are often short and rolled over.

Intentionally defective grantor trust (IDGT). An irrevocable trust written so its assets are outside your estate for estate tax, while you are still treated as the owner for income tax. You can sell assets to the trust for a note at the IRS minimum interest rate, freezing their value in your estate at the note amount, while growth accrues to the trust. Because you pay the trust's income tax, the trust grows untaxed, which is in effect an extra tax-free gift. The IRS confirmed in Revenue Ruling 2023-2 that assets in such a trust do not receive a step-up in basis at your death if they are not in your estate.

Spousal lifetime access trust (SLAT). One spouse makes a gift into an irrevocable trust for the other spouse and often the children. The gift uses the giver's exclusion and removes future growth from both estates, while the household can still receive distributions through the beneficiary spouse. The risks are divorce and the death of the beneficiary spouse, either of which ends the household's indirect access.

Qualified personal residence trust (QPRT). You transfer your home to a trust and keep the right to live in it for a set term; the taxable gift is reduced by the value of that retained right. After the term, the home belongs to the trust or the children, and you must pay fair rent to keep living there. If you die during the term, the home returns to your estate.

Dynasty trust. A long-lasting trust, allowed in many states for many generations, that uses the generation-skipping exemption so the assets are not taxed again as each generation dies. It also protects each generation's share with the spendthrift provisions described in chapter 6.

What these trusts cost

Legal fees to draft them, annual tax returns for some, trustee and appraisal fees, and the discipline to follow the paperwork exactly: a GRAT payment made late, or a trust account used for personal spending, can undo the plan. They also depend on tax law that can change. Ask any adviser recommending one to show the estate tax it is expected to save, in your own numbers, against what it will cost.