How Long Must a Trust Be in Place to Avoid Inheritance Tax?

by Tom Streissguth
Trusts create some unique tax situations.

Trusts create some unique tax situations.

Ryan McVay/Digital Vision/Getty Images

A trust is a method of protecting your assets from a complex and expensive trip through the probate courts, which have the authority to review and modify an ordinary will so that it conforms with state law. With a trust, you name a trustee to handle the transfer of assets to your named beneficiaries after your death. Some kinds of trusts also allow your estate to avoid taxes levied by the Internal Revenue Service.

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Dating

In estate tax matters, the dating of a trust is not relevant. If the trust is properly drawn up, you can avoid estate taxes no matter when you create the document. The IRS does not make provision for any tax exemptions based on the year the trust was created or how old it is.

Unified Tax Credit

It’s important to remember that the IRS allows a unified tax credit that protects a limited amount of your property from estate tax no matter who you leave that property to. The amount of the unified tax credit varies from one year to the next, depending on the whims of federal lawmakers. In addition, the IRS does not levy any estate tax on assets passed to your spouse.

Revocable Trusts

If you set up a revocable trust, you have the right to change the trust at any time. You may add or remove beneficiaries from the trust, change the terms of the document or appoint a new trustee to handle the trust. Since you keep control of the assets in a revocable trust, the IRS considers you as still the legal owner of those assets, which are not sheltered from estate taxes.

Irrevocable Trusts

An irrevocable trust does not allow you to change its terms; legally you surrender control of the assets to the trust itself. Although there are ways to change the terms or petition a court to strike down the trust, the IRS considers an irrevocable trust to be a separate legal entity for tax purposes and does not levy estate tax on the assets on the event of your death. The dating of the trust is not relevant; as long as the document remains valid and in effect, the IRS treats it the same no matter its age.