by Jonathan A. Nelson
I previously wrote about some types of trusts that are used for estate planning and otherwise. Many estate planning trusts have probate avoidance as a primary purpose, although they may have other benefits, such as providing for financial management in the event of incapacity. There is a specific subset of planning around federal and state (for states that have one, unlike Virginia) estate taxes.
Below is a distilled look at some of the broad concepts and terms used in these tax planning tools.
Credit Shelter Trusts hold assets to maximize a surviving spouse’s use of the estate tax exemption. Generation Skipping Trusts give assets to the grandchildren’s generation to limit the estate tax on the children’s generation, and can act similarly to a QTIP (discussed in the previous post) by giving income to the children’s generation. An Irrevocable Life Insurance Trust (ILIT) makes a small gift now that allows a larger payout that does not count toward the Estate Tax exemption, in the form of life insurance proceeds.
Lifetime gifts to a Grantor Retained Annuity Trust (GRAT) of assets expected to appreciate can allow lifetime income and a low amount claimed on a gift tax return, based on the value of the asset minus the present value of the annuity, leaving more of the estate tax exemption for other assets. This and other mechanisms for completing gifts before death do have downsides – they still count toward the total estate tax exemption if already valuable, and you do not get a step up in basis at death if they have appreciated since acquisition. An Intentionally Defective Grantor Trust (IDGT) tries to reduce these downsides by selling instead of gifting, paying taxes with non-gifted funds, and allowing substitution of properties to maximize the effect of the step up in basis on property outside the IDGT. As a brief aside, the statutes and IRS rulings try to uphold the principle that the step up in basis is really to prevent double taxation of assets which are subject to the federal estate tax (even if the size of that tax's exemption prevents taxation for most people); put another way, for every asset left behind by a decedent, it should get either a step up in basis or avoid counting toward the estate tax exemption, but not both.
A Crummey Trust is set up to accumulate the annual gift tax exemptions for a number of beneficiaries by giving beneficiaries an annual option (which they should not take!) to take money from the trust, thereby making at the end one large gift without it counting toward the overall estate tax exemption. If one spouse is not a U.S. citizen, a Qualified Domestic Trust (QDOT) may be needed to avoid the lower estate tax exemption and loss of unlimited marital transfers for non-citizens.
Charitable strategies to reduce the taxable estate with qualifying gifts but maximizing certain returns to beneficiaries can include Charitable Lead Trusts (an annuity to charity then gift to family) or Charitable Remainder Trusts (the reverse). There are enough variations in charitable trusts that a separate post is warranted for more detail, and sometimes it is sufficient to just use a charitable ‘safety valve’ that gives to charity what would otherwise be a small amount over the estate tax exemption.
With the federal estate tax exemption change in the One Big Beautiful Bill allowing a married couple both dying in 2026 to pass $30,000,000 to beneficiaries before the tax starts to apply, fewer people need to use trusts for estate tax planning or managing their taxable estate.
When needed, this planning can be very complex to set up and exacting in its administration. It requires a knowledgeable estate planning attorney, and that attorney will likely need to be in close contact with your accountant and other financial professionals. It also requires updates and upkeep more frequently than most other estate plans. However, the consequences of failing to make and maintain such plans can be significant tax bills, and they may be timed in a way that requires liquidation of assets (such as real estate or a family business) which were intended to provide continuing benefit to your survivors.
Virginia attorney Jonathan A. Nelson uses his extensive legal knowledge and trial experience to resolve conflicts, negotiate settlements, navigate compliance matters, and vigorously advocate in the courtroom in order to achieve the best possible outcomes for his clients. He practices in estate planning, probate, trust and estate administration, corporate law, and civil litigation related to these fields.
The attorneys of Smith Pugh & Nelson, PLC, offer the experienced counsel, personal attention, and customized legal services needed to address the many complex issues surrounding estate planning, probate, and trust administration. Contact us at (703) 777-6084 to schedule a consultation.