Living Trusts and Taxes: You Must Prepare Properly to Minimize Estate Taxes

Most of the trusts created to minimize tax liability are irrevocable. However, the popular revocable living trust the people use to avoid probate can sometimes also be used to minimize estate tax liability for married couples.

The trust must be drafted with this intention to accomplish this goal. Otherwise, the IRS and the Massachusetts Department of Revenue treat property in a revocable living trust as part of your estate for tax purposes.

Unlike many jurisdictions, Massachusetts is not shy about taxing someone’s property when they pass away. Any estate worth $1 million or more can be hit with significant estate taxes. But a living trust could reduce or eliminate that tax hit.

How to Use a Living Trust to Reduce Taxes in Massachusetts

For married couples who own $1 million or more in assets, their estate planning attorney can create a trust with specific provisions. These provisions would state that upon the death of one spouse, the property within the trust will be divided into two separate trusts. One trust is the family trust, also called the bypass trust or credit shelter trust. The trust document should specify that up to $1 million should be placed in that trust.

The second trust is generally referred to as the marital trust. The surviving spouse can be the beneficiary of both trusts and use funds as needed. When that spouse passes away, depending on the total value of assets in both trusts, they could both be below the tax threshold so no estate tax would be due.

If a couple’s assets total over $2 million, there are other strategies that can be used in conjunction with the living trust to minimize estate tax liability. The key is to plan ahead by ensuring that the living trust contains the correct provisions and that successor trustees understand how those provisions work.