3 Trusts to Shield Assets From Estate Taxes

Many individuals take advantage of legal trusts to shield assets from estate taxes and redistribute them smoothly to their heirs.

You can shield your assets from estate taxes using a variety of trusts.Shutterstock

The average American pays plenty of taxes over a lifetime. But Uncle Sam even wants a cut after we die. That cut is called the estate tax—often referred to as the “death tax.”

The good news is that most people won’t owe any estate taxes. One of the reasons for that is the lifetime gift/estate tax exemption, a threshold that makes the death tax a non-issue for many of us. For 2025, the lifetime estate tax exemption is set at $13.99 million. Estate taxes are levied only on assets that exceed that amount after an individual’s death.

The bad news is that the current high threshold was set by the Tax Cuts and Jobs Act (TCJA), signed into law by President Donald Trump in 2017. In 2026, barring a move by Congress, the lifetime estate tax exemption will go back to pre-TCJA levels of about $7 million. That means many affluent individuals could be subject to estate taxes at the end of the year.

Many individuals take advantage of legal trusts to shield assets from estate taxes and redistribute them smoothly to their heirs.

Generally speaking, a trust is a legal arrangement in which the trust holds assets for the benefit of another (the beneficiary), according to specific instructions set by the creator of the trust or grantor.

Trusts can hold a variety of assets, including real estate, vehicles, cash, jewelry, bank and deposit accounts, investment accounts, and retirement accounts.

In general, when you set up a trust, assets become the property of the trust. So they essentially leave your estate and, thus, are no longer part of your taxable estate.

There are many different types of trusts. Let’s take a closer look at some of the more common ones.

Establishing a trust is a common-sense way to shield your assets from estate taxes. goodluz/Shutterstock

Irrevocable Trust

With an irrevocable trust, you permanently give up ownership of all assets transferred to the trust. So you can’t take them back. And you can’t change the beneficiaries without their approval.

The upside of an irrevocable trust is that it removes assets from your taxable estate. Plus, assets like investments can continue to appreciate within the trust. And the assets within an irrevocable trust are generally shielded from creditors.

Irrevocable Life Insurance Trust (ILIT)

An irrevocable life insurance trust (ILIT) is designed to own permanent life insurance policies and keep death benefits outside of your taxable estate, thereby reducing or eliminating estate taxes.

How does this work? If you owned an insurance policy as the insured, the death benefit would be part of your taxable estate. This means it could be subject to estate taxes. But when you establish an ILIT, the trust owns the policy instead of the grantor. This effectively removes the death benefit from the grantor’s gross estate. 

Unlike term life insurance, which provides coverage for a specific period of time, permanent life insurance provides coverage for your entire life and may include a cash value component.

ILIT insurance premiums are typically paid using a checking account owned by the trust. Proceeds are then paid out to the beneficiaries based on the instructions set by the grantor. Because the trust is irrevocable, the grantor generally can’t alter it once the trust is created.

If properly managed, an ILIT can protect a beneficiary’s access to government aid such as Social Security disability income and Medicaid. That’s important peace of mind if you have a family member with special needs.

But it’s important to keep in mind that if you transfer an existing life insurance policy to an ILIT, there’s a three-year lookback period in which life insurance proceeds could be included in the grantor’s estate.

A Qualified Personal Residence Trust (QPRT) can allow you to pass a home on to your heirs during your lifetime while minimizing or eliminating gift and estate taxes on the property. Kzenon/Shutterstock

Qualified Personal Residence Trusts

A Qualified Personal Residence Trust (QPRT) allows you to transfer a residence to an irrevocable trust, removing the property’s current value and future appreciation from your estate.

If you set up a QPRT, you will be allowed to live in your home for a certain number of years or term before passing it on to beneficiaries, with “retained interest” in the home. Once that time period is over, the property will pass on to your heirs as “remainder interest” with little or no gift tax on your end. Because a QPRT involves a transfer during your lifetime, you would be avoiding estate taxes and minimizing gift tax as well.

While the gift tax and estate tax are two different types of taxes, they share the lifetime exemption. The lifetime gift and estate tax exemption stands at $13.99 million for 2025. So if you gift $5 million in your lifetime, only $8.99 million is left to shelter your estate upon death. 

In the case of QPRTs, you’d be passing on property (your home) to heirs. So it counts as a gift. But because you will retain the right to live in the home for a set term before it transfers to your heirs, the gift amount would be less than the home’s fair market value, lowering the tax burden.

Here’s how that works.

The value of the time you live in your home based on trust terms is calculated as its retained interest.

The retained interest is calculated using the home’s assessed value, the trust’s term, your age, and the prevailing Section 7520 interest rate. The retained interest as a percentage is applied to the home’s value. The result is subtracted from the home’s value to get the remainder interest. This would be the “value” of the gift.

This would be deducted from the lifetime gift and estate tax exemption of $13.99 million for 2025. After the term, the home passes onto beneficiaries free from gift and estate tax as long as the remaining interest doesn’t exceed the exemption.  And it doesn’t matter how much the home appreciated in value during the terms of the trust.

Once the term ends, you will lose ownership of the home. You'll have to leave or enter into a lease agreement.

However, if you die before the term of the trust ends, the home is considered part of your taxable estate, and the tax benefits will not apply.

QPRTs may also be utilized for second homes or vacation properties. And they’re particularly beneficial when interest rates are high, because high interest rates can lower the property’s gift tax value.

The Bottom Line

The estate tax exemption is set to shrink to $7 million from $13.99 million in 2026 if Congress doesn’t act. This could place a heavy tax burden on affluent families. But you can shield your assets from estate taxes using trusts such as ILITs or QPRTs.

Trusts can be complex. It’s essential you work with a qualified estate planning attorney to establish a trust with terms unique to your situation.

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