Question:

Can I avoid federal estate taxes by creating a revocable living trust to transfer my assets to my spouse and two adult children after my death instead of setting up an AB irrevocable trust?

Answer:

A basic revocable living trust doesn't reduce estate taxes at all; its main purpose is to keep your property out of probate court after you die.

You also can't avoid federal estate taxes by creatively juggling the percentages of your property that each family member will receive from the trust (for instance, 50% to your spouse and 25% to each adult child). The amount each person receives doesn't matter for federal estate tax purposes. Instead, the total value of the estate determines whether or not there will be a federal estate tax.

On the other hand, an AB ("bypass") trust is designed to save on estate taxes by leaving some property to your children, but also allowing your surviving spouse to use it (and any income it produces) while living. That way, your spouse doesn't legally own the property, and it won't be subject to estate tax at your spouse's death.

However, most married couples don't need to worry about federal estate taxes (but beware that some states have their own estate taxes and inheritance taxes). For deaths in 2024, married couples can transfer $27.22 million in assets ($13.61 million for a single person) 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 an estate tax.