Can I avoid estate taxes with a basic living trust?

Question:

Can I avoid federal estate tax by granting my wife and two adult children 50%/ 25%/ 25%, respectively, through a revocable living trust, rather than setting up an AB irrevocable trust?

Answer:

A basic revocable living trust does not reduce estate taxes by one red cent; its only purpose is to keep your property out of probate court after you die. Nor can you accomplish this trick by creatively juggling the percentages of your property each family member will receive.

On the other hand, an AB ("bypass") trust is designed to save on estate taxes by leaving some property to your children, but allowing your surviving wife to use it (and any income it produces) during her lifetime. That way, she does not legally own the property, and it won't be subject to estate tax at her death.

However in 2013, married couples can transfer up to $10.5 million of assets without owing federal gift or estate tax. This ability to combine each spouse's individual estate tax exemption is called "portability." For most couples, this eliminates the need to create an AB trust to avoid estate tax.

Read more about AB Trusts.