Who Pays Estate Taxes?

An estate tax is a levy the federal government charges in part of your taxable estate upon your demise. As of 2025, the government has placed an estate tax exemption of $13.99 million for individuals and $27.98 million for married couples. Only the assets worth more than these values are subject to federal estate tax, which is between 18% and 40% depending on the estate size.

Bloomfield Hills estate planning lawyers highlight that the estate pays estate taxes before the assets are distributed to the heirs. This legal requirement can reduce a considerable portion of the distributable estate, leaving beneficiaries with a smaller inheritance. They advise leveraging various effective estate planning strategies to minimize these taxes.

How Do Trusts Work in Reducing Estate Taxes?

For a trust to reduce estate taxes, trust attorneys in Bloomfield Hills explain that it must be irrevocable. That means that you can’t change the trust’s terms or remove assets from it once you transfer them. Doing so ensures the assets held are excluded from your taxable estate.

While all irrevocable trusts can help reduce estate taxes, you must familiarize yourself with specific types you can incorporate in your estate plan for maximum effect. Creating them can be a lengthy process, but skilled Bloomfield Hills trust lawyers can guide you to ensure the trusts comply with state and federal state laws.

Qualified Personal Residence Trusts

A Qualified Personal Residence Trust (QPRT) allows you to transfer property, such as your home, into the trust’s name and then list yourself and your heirs as the trust’s beneficiaries. This allows you to continue using the home during your lifetime and let your heirs use the home after your demise. The outcome is that the trust owns the property, but you will still benefit from its use.

One advantage of the trust is that the property won’t be subject to tax. While you and the other beneficiaries can continue living in the house, you don’t own it, so it doesn’t contribute to your estate for tax purposes. If the home increases in value during your lifetime, it won’t be added to the initial value when your heirs inherit it.

This strategy can be helpful if you own multiple houses in locations where properties quickly appreciate. However, a QPRT is not without risk; if you die before the end of the trust, your beneficiaries will not enjoy any tax savings.

Irrevocable Life Insurance Trust

A life insurance trust has various tax benefits. The funds you transfer into the trust can pay premiums for one or more life insurance policies, such as a term policy or whole life policy. With an irrevocable life insurance trust, money placed in the trust is tax-deductible in that year. 

After your demise, the trust inherits the proceeds or death benefit, not your estate. Assets distributed through the trust are exempted from estate taxes. Bloomfield Hills trusts lawyers say that an irrevocable life insurance trust can reduce state and federal taxes on a tax return during your lifetime. 

Besides, it can help you control the timing and distribution of the trust’s assets while avoiding estate taxes after death. Nonetheless, there are some caveats to consider:

  • You must provide funds for the trust to pay all premiums, but the transfers may be subject to gift taxes if they are worth more than the annual gift tax exclusion value
  • You may fund the premium payments upfront by transferring an income-producing asset to the trust. However, seek legal counsel to ensure this approach doesn’t trigger other tax liabilities.
  • If you transfer ownership of an existing policy, remember it may be considered part of your estate for 3 years from the transfer date.

Grantor Retained Annuity Trusts

A grantor-retained annuity trust (GRAT) enables you to retain the right to receive annuity payments from the fund for a specific period or the rest of your life. Your designated beneficiaries receive the remaining assets upon the trust’s expiry without incurring substantial gift taxes.

However, if you die before the trust expires, the assets will return to the estate, attracting the same tax implications as if the GRAT never existed. This risk may limit the trust’s effectiveness for older grantors or those in poor health.

Alternatively, you can establish a shorter-term GRAT to transfer assets you expect to appreciate quickly, such as IPO shares. They can pass to your beneficiaries without counting against your lifetime exemptions for gift and estate taxes if they appreciate beyond the IRS-prescribed rate.

Spousal Lifetime Access Trusts

If you’re married, consult skilled trust attorneys in Bloomfield Hills about spousal lifetime access trusts (SLATs). You can use these revocable trusts to reduce estate tax liability while providing income for a surviving spouse. The trust may also offer a state income tax benefit.

A Skilled Estate Planning Attorney Helping You Navigate Estate Taxes by Establishing Trusts

Estate taxes can accumulate into a sizeable amount based on your estate’s size, leaving your loved ones with a smaller portion of the inheritance. Luckily, you can utilize tax-effective strategies to reduce these deductions to protect the future and interests of your loved ones. Bloomfield Hills estate planning attorneys can provide more insights and legal support.

The Kendal Law Group, PC, has dedicated trust attorneys in Bloomfield Hills. Proper planning for your future can give you peace of mind by helping you set up your finances for the future. Our team can provide a comprehensive estate planning strategy to meet your goals. Call us at 248-609-1718 to schedule a FREE consultation.