Trust planning

Using trusts as part of an estate plan can provide more control over how assets are distributed.

  • Private Wealth Management

Key takeaways

  • If you'd like to have a plan to help ensure that your heirs and favored charities inherit your assets in a clear and streamlined fashion, or if you'd like to try to maximize the amount that is ultimately transferred to them, trust strategies may be sensible options.
  • The decision of whether to opt for a revocable or an irrevocable trust is often based on the question of whether you are comfortable relinquishing control of the asset(s).
  • There are many types of irrevocable trusts that may be suitable for many different situations and goals.

What are you trying to accomplish with your estate plan? For many, it's important to have a plan that will make it easy for their children, grandchildren, other relatives, friends, or favorite charities to inherit their assets in a clear and deliberate fashion. It may also be important to try to maximize the amount that is ultimately transferred to heirs and charities, which means using strategies that help reduce or potentially eliminate federal and state estate taxes (also referred to as transfer taxes). The opportunity for professional management of transferred assets (e.g., trust services or investment management) may also be appealing.

With these objectives in mind, revocable or irrevocable trusts may make sense as components of an estate plan. When considering a trust, it's important to decide whether you should give away assets today, or at some point in the future. When should you let go?

While this article discusses the "nuts and bolts" of different trust strategies, the topic of estate planning is a very broad one and we are just skimming the surface. It's important to work with your attorney, your accountant, and other professionals to help ensure that your estate plan aligns with your needs and goals. Your financial legacy is also very personal, and before making decisions regarding trust strategies and when to relinquish control of any assets, it's important to talk to your family about your estate plan. Your wealth management advisor can guide you through this process so you can have successful family conversations about your estate plan and your legacy.

A revocable trust may make sense if you want to maintain control

If keeping things simple is a goal, a revocable trust could be a good option because it offers individuals (grantors) the greatest flexibility. The grantor retains ownership and is typically the trustee of any assets placed in the trust. When an asset is retitled to a revocable trust, it can be withdrawn for the grantor's benefit at any time.

If an individual already has a will that specifies how their assets should be distributed, why might a revocable trust still be needed? The main reason to use a revocable trust would be to avoid probate. Probate is the legal process used by state courts to distribute assets at an individual's death that are either designated by a will or, in the absence of a will, by the intestate laws of the decedent's state of domicile. Be aware that some assets, like IRAs or tax-deferred annuities pass according to the beneficiary designation, and thus are not subject to a will or revocable trust (unless the individual's estate or revocable trust have been named as the beneficiary1). This means, in general, these types of assets are not subject to the probate process. Generally, the assets selected by a grantor for inclusion in a revocable trust would not include these types of assets.

Avoiding probate is generally a good idea if an individual lives in a state that may have a complicated, time-consuming, or an expensive probate process. Other states, however, may have a relatively simple, straightforward, and less costly probate process. These factors and the anticipated amount of an individual's estate are just some of the items to consider when discussing with an attorney whether to establish a revocable trust. If an individual owns real estate in multiple states, a revocable trust may help avoid ancillary probate—a second probate heirs would have to go through for the assets located in another state.

Another consideration, though, is that the probate process is a matter of public record as a result of the court's involvement. If privacy is of concern, the use of a revocable trust may still be warranted.

By establishing a revocable trust, a grantor is making the decision to keep control of his or her assets while providing a plan that will distribute the assets in the trust in a clear and deliberate fashion. A "pour over" will is often done in combination with a revocable trust. This type of will directs any assets that a grantor does not retitle to his or her revocable trust while the grantor is alive to the revocable trust at death. The pour over will does not bypass probate but does provide for a coordinated distribution of any assets that pass through the will which can avoid potential conflicting provisions.

However, by only establishing a revocable trust, the grantor may not address the potential desire to lower any federal or state taxes that the grantor's estate may be exposed to at his or her death.

An irrevocable trust may be a sensible option to increase the amount you leave to your heirs

Deciding when to give up control of one's assets is complicated, and often involves balancing different, and often conflicting, objectives. It is a decision that shouldn't be entered into lightly, and should be made with the careful guidance of financial and legal professionals, and following conversations with family members, loved ones, and other intended heirs.

The decision to release control may go hand in hand with the decision to fund an irrevocable trust. Once an asset is contributed to an irrevocable trust, it is removed from the grantor's taxable estate and the grantor loses control of it. In other words, the grantor permanently gives away the asset. Therefore, before deciding to fund an irrevocable trust, a grantor must be certain they will not need the asset in the future.

Key characteristics Revocable trust Irrevocable trust
Who pays the tax? Grantor Grantor or trust (as a seperate tax-paying entity) depending on how the trust is structured
Avoids probate Yes Yes
Avoids estate tax No Yes, assuming amounts transferred are under the federal exemption
Opportunity for professional management* Yes Yes
*Professional trust services and/or investment management services are provided for a fee.

Why gift assets to an irrevocable trust? Generally, people fund irrevocable trusts to try to maximize the amount that is ultimately transferred to heirs and charities, and reduce the amount of potential federal and/or state estate tax paid. This might sound relatively simple to accomplish, especially if the grantor does not need the funds. However, the Internal Revenue Code (IRC) limits taxpayers' ability to give money away. In order to avoid gift taxes (another type of transfer tax), the taxpayer making the gift must ensure that the value of the gift is within certain annual limits, or use part of the taxpayer's lifetime transfer tax exclusion amount. The IRC permits an individual to gift to any other person (or trust) up to $15,000 ($30,000 if the transferor is a married couple) per year in 2020.2 This is called the "annual exclusion." By gifting the annual exclusion amount to an irrevocable trust, the transferor removes the asset from his or her ownership (estate), which, in turn, lowers any potential federal or state estate tax. Estate taxes are generally computed on the value of assets held by an individual at death. Therefore, if assets are removed from ownership, presumably, the individual will lower one of the factors on which estate taxes will be computed.

Tip: Generally, a revocable trust can be changed (or revoked) during a grantor's lifetime, while the ability to change an irrevocable trust depends on state law and the trust provisions, or may need the permission of a court.


Generally, a revocable trust can be changed (or revoked) during a grantor's lifetime, while the ability to change an irrevocable trust depends on state law and the trust provisions, or may need the permission of a court.

If a gift in any one year is made with a value above the annual exclusion amount, it is considered a taxable gift. The IRC further provides each individual with a federal lifetime estate and gift tax exclusion amount (which is $11.58M in 2020).3 In a year when a gift exceeds the annual exclusion, the taxpayer files a gift tax return (IRS Form 709) to inform the IRS how much of the taxpayer's lifetime exclusion amount is being allocated to protect the gift from transfer tax. Once this lifetime exclusion amount is exhausted, either during life or at death, any gifts above the $11.58M would then be taxed, currently at a maximum rate of 40%.4

A key benefit of gifting either the amount of the annual exclusion or of the lifetime exclusion to an irrevocable trust is that once the assets are removed from an estate, any future appreciation is also removed. This is why funding irrevocable trusts is also called an "estate freeze" technique. The value of the gift is determined as of the time the gift was made and not when the beneficiary actually receives the asset, essentially freezing the account balance from an estate tax standpoint. Keep in mind, however, that even though the appreciation is escaping estate tax, taxes may still be due. Income and capital gains taxes may be paid by either the trust or the beneficiaries once the asset is sold.

How "portability" changed the game

A discussion of the lifetime federal estate and gift tax exclusion would be incomplete without addressing the concept of "portability." For legally married couples, portability allows the transfer of all or any remaining portion of the first-to-die spouse's lifetime federal exclusion amount to the surviving spouse. Therefore, if at death, the first-to-die spouse had only used $3,000,000 of his or her lifetime exclusion amount, the surviving spouse would then be able to leverage the remaining $8,580,000, bringing the surviving spouse's lifetime federal estate and gift tax exclusion amount to $20.16M. The total exclusion amount for married couples remains the same ($23.16M). Prior to 2011, this transfer between spouses was not allowed; it was a "use it or lose it" proposition.

There are many types of irrevocable trusts that may be suitable for many different situations and goals There are A/B trusts (also known as marital and credit shelter trusts), GRATs, SLATs, QPRTs, IDGTs, and ILITs, among others. The following list is intended to help you navigate the alphabet soup of irrevocable trusts and briefly outlines a handful of the options available, which should be reviewed in detail with your attorney and tax professional. It is also worth noting that some of these trust structures can be used for the same trust, such as structuring a GRAT as an IDGT.

Marital trust

A Marital Trust (also referred to as a "QTIP" trust) is typically funded when the first spouse passes away with the assets in excess of the first spouse to die's remaining estate tax exclusion amount. This type of irrevocable trust may be established to provide for a surviving spouse while also ensuring that at his or her subsequent death, any remaining assets are ultimately transferred to the beneficiaries identified by the grantor in the trust document. This trust may also provide the surviving spouse with some asset protection benefits, depending on how it is structured.

Credit shelter trust

If a couple's anticipated lifetime net worth is, or is anticipated within the couple’s lifetime to be, above $23.18M (based on current federal estate tax rules), the couple might consider incorporating the use of a credit shelter trust ("CST") 3 as part of their estate plan. A couple may also wish to incorporate a CST into their estate plan if they live in a state with a separate estate tax.

A CST is funded when the first spouse passes away without fully utilizing their estate tax exclusion amount. Assets are then placed in the trust and are generally held apart from the estate of the surviving spouse, so they may pass estate tax free to the remaining beneficiaries at the death of the surviving spouse. The assets held in the CST can benefit the surviving spouse and/or other family members during the surviving spouse’s lifetime. However, when a CST is used in an estate plan, there is no step-up in basis on the assets inside the trust at the death of the surviving spouse.

Credit shelter trusts are also commonly known as bypass, family, or exemption trusts.

Disclaimer trust

Disclaimer trust provisions may provide more flexibility and portability versus other kinds of trusts. Disclaimer trusts differ from CSTs in that they are optional, and are activated only after the first spouse's death at the election of the surviving spouse. This allows the surviving spouse the ability to disclaim the inheritance of certain assets based on his or her current situation at the time of their spouse’s death. Since there is no need to keep assets within the family structure or to protect them from creditors, the spouse can simply receive all or a portion of the assets outright. This allows tax-planning flexibility without creating unnecessary complication.

In addition, disclaimer trusts may be a good way to help reduce state estate taxes (if your state imposes one) and may help address uncertainty over the size of the marital estate, or concerns that the exclusion amount may decline in the future. Similar to CSTs, when a disclaimer trust is used in an estate plan, there is no step-up in basis on the assets inside the trust at the death of the surviving spouse.

Qualitied personal residence trust

If a residence is a meaningful part of the overall value of an individual's estate, it may make sense to leverage a qualified personal residence trust ("QPRT") during the individual’s lifetime. This strategy involves the transfer of a personal residence to an irrevocable trust. The grantor is allowed to live in the residence for a number of years as outlined in the trust (the “term”), which results in a discount on the value of the contribution for gift tax purposes. As long as the individual outlives the term, the value of the residence is removed from the individual's estate. Once the term ends, the individual could continue to live in the residence by paying rent to the trust. The discount allowed on the initial gift of the residence to the trust results in the use of less lifetime exclusion, while also removing any subsequent growth on the value of the residence from his or her estate. A high interest rate environment is typically more favorable for QPRTs, however, the strategy can also work with low interest rates when home values may be depressed.

Spousal limited access trust (SLAT)

For some couples, this type of trust may offer a way to take advantage of the lifetime gift tax exclusion while retaining access to the assets. Here, the grantor ("donor spouse") makes a gift to an irrevocable trust typically for the benefit of the grantor’s spouse ("beneficiary spouse") and potentially other family members. The assets are removed from the grantor’s taxable estate—but typically a spouse (and/or other family members, if permitted by the trust) may tap into the funds during their lifetime while assets can continue to grow. This can be an effective strategy for those concerned about permanently gifting away too much of their wealth during their lifetime.

A SLAT may be drafted as a grantor trust, in which the income of the trust is taxed to the grantor rather than the trust itself. This allows the grantor's taxable estate to be reduced by the income tax payments while the income can be reinvested in the trust for potential additional growth. Language may be included to allow the grantor to substitute trust assets with other assets of equal value, which can be convenient if the grantor wants to take advantage of current estate tax laws and allow them to receive a step-up in basis on assets held in his or her estate.

Spouses wishing to create trusts for each other must be careful to avoid the reciprocal trust doctrine: if a husband creates a trust for his wife, and the wife creates a nearly identical trust for the husband, then the 2 trusts may be disallowed and treated for tax purposes as if each spouse had created a trust for himself or herself. In other words, the assets in each trust may be deemed to have remained in each spouse's estate.

Death and divorce are the two main factors that may impact a spouse’s ability to access assets in a SLAT. Before executing a SLAT, couples should confirm that they have a clear understanding of the trust provisions in event of a divorce and should ensure they have enough assets outside of any SLAT to maintain their accustomed lifestyle, should either event occur.

Grantor retained annuity trust

If an individual owns assets that are expected to appreciate significantly in value, a grantor retained annuity trust ("GRAT") might be an appropriate option. This is a fairly popular trust that gives the grantor some access to the assets (in the form of an annual annuity payment) for the term of the trust while allowing most appreciation to pass estate-tax free. The trust can be structured in such a way that the grantor does not use any of his or her lifetime exclusion. While the total value of the funds contributed to the trust is not removed from the grantor’s estate (the annuity payments come back in), it may still be an effective strategy since most potential growth of the assets will be removed from the estate. However, if the asset has lower appreciation than expected, the GRAT's usefulness may be reduced or even eliminated. Note that if the grantor passes away during the term of the trust, most, if not all, of the assets in the GRAT, as well as any appreciation on those assets, will be included in the grantor’s estate for estate tax calculation purposes.

Intentionally defective grantor trust

If an individual plans to use the entire federal transfer tax exclusion amount during his or her lifetime, and still would like to transfer more money to beneficiaries, then an intentionally defective grantor trust ("IDGT") could be used. The IDGT does not allow the grantor full control over the assets but rather it includes some "defects" in the drafting which cause the IDGT to be revocable for income tax purposes, yet irrevocable for estate planning purposes. With this type of trust, the grantor would continue to pay any taxes due on the earnings of the trust assets. This is beneficial since it preserves the trust assets that would have otherwise been depleted by paying the tax. At the end of the grantor's life, the assets in the IDGT will not be included in the grantor's taxable estate.

Irrevocable life insurance trust

An irrevocable life insurance trust ("ILIT") may be effective for those who own a life insurance policy, or are considering purchasing one, and would like to leave the death benefit to their estate potentially estate-tax free. If a policy is in place already, it can be transferred into this trust and, as long as the insured individual lives for three years following the transfer, the death benefit is completely removed from his or her estate.

Which type of trust might be right for you?

As you can see, there are many different types of trusts that may be beneficial depending on your particular circumstances, and this list is not exhaustive; there are many more available. The type of trust you choose will depend on your particular circumstances, as each has benefits and drawbacks. Also, there are many other technical considerations related to these trusts that we did not address. By working with your attorney and your tax professional, you can help ensure that the estate plans you make will help you meet your long-term needs, both for your lifetime and for your estate.

In conclusion

To determine the most effective plan for your estate, you will likely have to decide if you are comfortable letting go of certain assets and control. If you are not comfortable with relinquishing control, then you may be subject to higher estate taxes. If you are comfortable letting go, you will need to plan accordingly to help ensure that you have enough for yourself. Sufficient funds are needed not only to meet your current expenses, but also any unexpected costs you may incur in the future, should your circumstances change. A comprehensive financial plan, which incorporates all aspects of your finances and takes into consideration how your income and expenses may play out over time, can help you make that decision.

Your Fidelity Private Wealth Management team can help you think through these issues and work with your advisors to help you develop a plan appropriate to your unique circumstances and goals.