You’ve probably heard of the “death tax” or estate tax. But the truth is that most people won’t owe any estate taxes. That’s partially because the 2017 Tax Cuts and Jobs Act (TCJA) signed into law by President Donald Trump raised the lifetime estate tax exemption substantially.
In 2025, the
estate tax is levied on assets above $13.99 million that are transferred to heirs after an individual’s death. But key provisions in the TCJA are set to sunset or expire on Dec. 31, 2025. So in 2026, the estate tax exemption would reduce to about $7 million (adjusted for inflation).
This means many more estates could be hit with taxes next year. Federal estate tax rates range from 18 percent to 40 percent. And after the TCJA sunsets, the top rate would remain 40 percent. Moreover, these states and district levy their own estate tax with varying rates:
- Connecticut
- Hawaii
- Illinois
- Maine
- Maryland
- Massachusetts
- Minnesota
- New York
- Oregon
- Rhode Island
- Vermont
- Washington
- District of Columbia
But there are ways to reduce your taxable estate in order to shelter it from estate taxes. One way is to establish an irrevocable trust.
What Is an Irrevocable Trust?
An irrevocable trust is a type of trust that the creator or grantor relinquishes control of. This means the grantor can’t take assets back out of the trust nor change beneficiaries without the consent of the beneficiaries or a court order. Because you don’t control or own the trust, you must designate a third-party trustee to manage the trust and the assets within.
Once the trust is established, you can transfer virtually any asset to an irrevocable trust, including:
- cash
- stocks
- bonds
- mutual funds
- exchange-traded funds (ETFs)
- life insurance policies
- business interests
- real estate
Benefits of an Irrevocable Trust
While it may seem like an irrevocable trust has many drawbacks, these trusts have some key benefits.
Because you relinquish control of assets transferred to the trust, these assets no longer belong to you. As a result, they are no longer part of your taxable estate. So assets transferred to the irrevocable trust essentially reduce your taxable estate. This could help you reduce or avoid estate taxes. In addition, the assets within an irrevocable trust could appreciate while staying outside of your estate.
Plus, assets held in an irrevocable trust are also generally shielded from creditors. And it can help your family and loved ones avoid the lengthy and complex process of probate. Moreover, irrevocable trusts are private. This means the public can’t see details about the trust, such as its contents and beneficiaries.
But there are many types of irrevocable trusts. So let’s take a look at some of your options.
Types of Irrevocable Trusts
To meet your philanthropic goals, you could set up a charitable trust. There are two types.A charitable remainder trust is set up so assets are transferred to beneficiaries for a set period and the remainder after the term is sent to a charity.
A charitable lead trust works the opposite way. You set up the trust so assets are transferred to a charitable organization first and the remainder is sent to beneficiaries.
But there are other types of trusts you can establish, such as an irrevocable life insurance trust. You can have the trust itself purchase an insurance policy in your name. You then transfer money to the trust that the trustee uses to pay the premiums with. And when you pass, the insurance payouts are made directly to the trust and then sent to the designated beneficiary. This effectively removes those assets from your taxable estate.
And if you are worried that your beneficiaries may squander or misuse their inheritances for whatever reason, you could turn to an irrevocable spendthrift trust. This kind of trust allows you to stipulate exactly how and when assets are distributed to beneficiaries. For instance, you may decide the beneficiary receives assets in increments over a set period of time instead of one lump sum. But as with any irrevocable trust, the assets transferred to the trust are no longer yours and could thus reduce your taxable estate.
Downsides to an Irrevocable Trust
The main disadvantage to an irrevocable living trust is that you have little control over it. Once you transfer assets, you can’t take them back. And you generally can’t change beneficiaries without their consent. So if you change your mind about who gets what, there’s little you can do without a court order.The Bottom Line
With the TCJA set to sunset in 2025, the lifetime estate tax exemption is set to shrink unless Congress acts. So in 2026, the lifetime estate tax exemption could drop to about $7 million. This means more individuals could face federal estate taxes with rates ranging from 18 percent to 40 percent. But an irrevocable trust could help you reduce your taxable estate, while leaving behind a legacy for your loved ones.The Epoch Times copyright © 2025. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.
