Everyone who has reached the age of majority should have an estate plan. An estate plan can accomplish many things. Of course, your estate plan can direct the disposition of your property following death; however, it also can also help arrange for the management of your financial and your healthcare decisions during your lifetime should you become incapacitated.
Common ways to transfer property at death include a last will and testament (will), beneficiary designations and joint tenancies with right of survivorship; financial and healthcare management authorizations can be found in powers of attorney and living wills. Integrating trusts into your estate plan can further your goals when it comes to managing and disposing of your wealth. This article will explore some of the reasons people use trusts in their plans and the benefits of doing so.
What is a Trust?
Originating in English common law, trusts have been used for centuries to manage property. Basically, a trust is a form of property ownership that separates beneficial ownership from legal ownership. 1The instrument creating the trust names a trustee as the legal owner of assets while designating one or more beneficiaries to enjoy the benefits of the property held in trust. The person who created the trust and transferred assets to the trustee is known as the grantor or settlor (for ease of reference, settlor). The settlor sets the conditions and rules for usage of the property owned by the trustee. The trustee carries out the settlor’s directions for the benefit of the trust’s beneficiaries.
Trusts create interests in property. With limited exceptions, state2 law governs interests in property and ownership rights. 3 In many cases, the settlor of a trust can choose the law that will apply to the trust. 4 However, to be sure that the choice is respected, especially for tax purposes, it is important that the trust have some connection with the state whose law will be applied (known as nexus). The reverse is also true, to avoid having a state assert jurisdiction over a trust, it is necessary avoid having a nexus to the state. 5
Types of Trusts; Taxation
There are many reasons to create a trust. The terms of the trust will suit its purpose and will impact its taxation. The United States and many of the individual states impose income taxes on trusts and their beneficiaries. Additionally, the United States imposes gift, estate, and generation-skipping transfer (GST) taxes, which are excise taxes upon the transfer of property at death and during life by gift (for ease of reference, collectively, transfer taxes). Many states also impose estate and inheritance taxes, with Connecticut being the only state that imposes a gift tax. 6
Anyone who has filed an income tax return knows how complicated taxes can be. Trust taxation is no different. Below are some general terms used to describe different types of trusts for tax purposes. By necessity, the following definitions are painted with a broad brush, however your personal tax and estate planning advisors can describe in detail how different types of trusts could fit into your plan.
- Grantor Trust: A “grantor trust” is a trust over which the settlor (or in limited cases a beneficiary) has reserved a power or benefit causing the settlor (or beneficiary) to be treated as owning the trust’s assets for federal income tax purposes – even though they don’t own the assets themselves. As a result, the settlor will pay federal income tax on the income earned by the assets of the trust, even though the assets are owned by the trustee (and not the settlor). In states that base their income tax systems in whole or in part on the federal system, the settlor may also owe state income tax on trust income. 7
- Non-grantor Trust: A non-grantor trust is a trust that is not a grantor trust and is a separate taxpayer.
- Completed Gift Trust: A completed gift trust (a colloquialism for ease of reference) is a trust that has received a gratuitous transfer of an asset, which is a gift subject to the federal gift tax system (even though the application of certain deductions and exclusions may cause no gift tax to be due). To be a completed gift, the settlor gives up the right to control the use or enjoyment of the property. 8 Usually, a completed gift trust is designed so that upon the settlor’s death none of its value is included in the settlor’s gross estate and subjected to estate tax. It is possible that the terms of the trust could cause the value of the trust to be subject to estate tax, 9 but this is usually not desired.
- Incomplete Gift Trust: An incomplete gift trust (a colloquialism for ease of reference) is a trust the terms of which reserve to its creator the ability to alter the trust or its beneficiaries or to control the enjoyment of the income or assets of the trust. A gratuitous transfer to such a trust would not be a gift for gift tax purposes. A transfer tax would generally be imposed, however, when the power causing the gift to be incomplete was exercised or terminated.
Using Trusts in Your Plan
There are many different uses for trusts, and it is not possible to review them all here. Nevertheless, described below are some common uses of trusts in estate planning.
Property management and avoiding probate
Probate is the legal process by which the appropriate government agency or court (it is different from state to state) determines that a document is a will. In some states, the process is quick and easy, in others it is difficult and time consuming. However, your will only directs the after-death disposition of property that you own. Other property, like IRA accounts, retirement plans, and life insurance do not follow your will, instead they are distributed pursuant to a beneficiary designation (unless the beneficiary designation directs that property be paid to your estate). Other property, like a bank account or parcel of land titled as a joint tenancy with right of survivorship, passes to the surviving joint tenant by operation of law.
If you live in a state where the probate process is long and difficult, or where estate administration is heavily supervised, contributing property to a revocable trust (by titling the property to the trustee during your lifetime) will allow you to avoid the probate process with respect to that property.
A revocable trust is exactly what it sounds like, a trust that is revocable by its settlor. If you create a revocable trust, during your lifetime, you would usually be the trust’s initial trustee and beneficiary. Generally, you can completely dissolve the trust, change its terms, and remove its assets. The terms of the trust agreement will direct the trustee as to what it may, or must, do with any property held in the trust.
Generally, when you transfer assets to a revocable trust, there are no gift tax consequences because you may revoke the trust and remove the property from the trust at any time. The gift is “incomplete” because you retain control of the property in the trust. 10
Upon your death, the successor trustee steps in to administer the trust and its assets for the benefit of the trust’s next beneficiaries. Because the successor trustee steps in immediately following your death, there is no delay like the delay caused by the probate process and the appointment of an executor to administer your estate. Further, using a revocable trust may be more private than disposing of property through a will. A will admitted to probate becomes a public record. In many jurisdictions, however, a revocable trust need not be filed with the authority that probated the will. In those states, the terms of the trust, its beneficiaries, and the disposition of property through the trust, remain private. The trustee will follow the directions in the trust with respect to the disposition of the trust’s assets. The trustee may be directed to distribute the assets remaining in the trust, thereby terminating the trust. Alternatively, the trust may contain provisions directing the trust to continue including how long it will continue, who the beneficiaries will be and the conditions for making distributions to the beneficiaries. If the trust continues after the death of the settlor, it will become irrevocable.
Another benefit to using a revocable trust is property management during your lifetime. Should you become incapacitated your successor trustee will step in to manage the property in the trust. This provides continuity of management, avoiding the need to qualify an agent under power of attorney with different financial service providers or, in the absence of a power of attorney, the need for a court-appointed guardian of your property.
Life insurance planning
Life insurance is a tax-favored asset. For income tax purposes, the cash value that builds up in a life insurance policy (if any) is not subject to income tax. 11 Unless certain exceptions apply, the death benefit from a life insurance policy is also not subject to federal income tax. 12 If a policy of life insurance is owned by someone other than the insured, the insured has no incidents of ownership in the policy, and the death benefit is not payable to the insured’s estate, then the death benefit will be paid free from federal estate tax. 13
One way to avoid the imposition of an estate tax on the death benefit from a life insurance policy is to have the policy owned by the trustee of an irrevocable life insurance trust (ILIT). Of course, because the insured cannot have incidents of ownership over the policy, the insured should not be the trustee or beneficiary of the ILIT. Also, the insured should have no rights over the policy in the ILIT. If a policy of life insurance is owned by the trustee of a properly designed and administered life insurance trust, the death benefit will be paid into the trust without an estate tax. Further, unless some other power causes estate tax inclusion, so long as the death benefit (as invested) remains in the trust, it should not be subject to estate tax in the trust beneficiaries’ estates either.
To keep a policy in force, its owner must pay premiums to the insurance company that issued the policy. Transferring cash to an ILIT, so that the trustee can pay a policy premium, without more, would likely be a gift, potentially subject to gift tax. An ILIT can be designed so that cash gifts transferred to the trust qualify for the annual exclusion from gift tax. To qualify for the annual exclusion, a gift must be of a present interest in property, meaning that the beneficiary can access the gift immediately. 14 To qualify a gift in trust for the annual exclusion, many trusts give the beneficiary the power to withdraw the gift only for a specific period, 15 after which the power expires. 16
A plan where gifts to an ILIT are limited to available annual exclusion amounts could limit the amount that can be given to the trust, which in turn could limit the size of the policy that can be purchased. Moreover, fully utilizing your annual exclusions to fund a life insurance trust would cause any other gifts made directly to the trust beneficiaries to use some your lifetime exclusion amount, or if your exclusion amount has been fully used, require payment of a gift tax. If you wanted to create an ILIT to hold a policy larger than what can be supported by your annual exclusions, you could consider using your lifetime exclusion amount to prefund an ILIT. The trustee could invest the amount transferred to the ILIT and the income and principal of the trust could be used to support the premiums on a life insurance policy. 17
In short, it is possible for your beneficiaries to receive a tax-free cash death benefit following your death.
Saving estate tax
The federal government imposes an estate tax, as an excise tax on the value of assets passing at death. In 2025, each citizen (and resident) of the United States has an exclusion from the federal estate tax of $13,990,000. In 2025, a married couple has a combined exclusion amount of $27,980,000. If the value of your “taxable estate” exceeds your available estate tax exclusion at death, an estate tax (with a top marginal rate of 40%) will be imposed on such excess. 18
Transferring property to a trust during life is one way to save future estate tax. Making annual exclusion gifts to trusts removes the value of the gift and its appreciation from the date of gift until your death from your gross estate and the federal estate tax. (See above with respect to making annual exclusion gifts in trust.) 19 Making gifts during your life up to your gift tax exclusion amount removes the appreciation on the amount transferred from the date of the gift to your death from your gross estate. Further, unless Congress changes the law, the gift and estate tax exclusion amount is scheduled to be approximately halved (indexed for inflation) on January 1, 2026. If you make a gift before that date and the exclusion amount is reduced in 2026, then the excess over the total amount transferred before January 1, 2026, and the reduced exclusion amount when you die would also be excluded from your gross estate and escape estate tax. 20
You can use many trust planning techniques to reduce or freeze the value of your estate for estate tax purposes. A spousal lifetime access trust (SLAT) allows you to transfer assets to a trust for your spouse but allow your spouse to access trust income or principal should your family need additional resources.
A transfer to a grantor retained annuity trust or a sale of property to an intentionally defective trust, allows you to freeze the value of the assets in your estate, limiting their growth in your estate to an interest rate set by the Treasury Department and published by the IRS. Moreover, assets owned by a grantor trust (see above) grow income tax free inside the trust, allowing the compounding base to grow more quickly in the trust, keeping a greater amount of appreciation out of your estate and reducing your estate by the income tax that you pay on the trust’s income.
Trust planning is complicated. To determine whether a, trust plan is right for you and your family, consult an experienced attorney in your home state and the state in which you plan to create the trust.
Building multi-generational wealth
Benjamin Franklin reputedly said: “Money makes money. And the money that makes money makes more money.” This pithy statement is nothing more than a description of compound interest and the impact of an exponential function. Let’s take a simple example. Assume you invest $1,000 and receive 4% every year (ignoring fees and taxes). Then, let’s allow that investment to compound for 250 years, approximately the age of the United States. At the end of that time, that $1,000 would have grown to $18,127,371.
Of course, this example is somewhat unrealistic, because income (and sometimes principal) is subject to tax (reducing the compounding base) and because markets don’t simply advance at a stated rate of return. Moreover, not only is income subject to income tax, but an individual’s assets could also be subject to an estate tax as each generation dies.
In addition to the federal estate tax (described above), the United States imposes a generation-skipping transfer tax (GSTT), which is a tax on the transfer of property, either during life or at death, to someone who is more than one generation below the “transferor,” such as a grandchild. The transfer does not have to be made directly to the beneficiary for the GSTT to be imposed. Trusts that skip over generations are also subject to the GSTT. For example, if you were to create a trust that paid income to your child, and following the child’s death continued for a grandchild, upon your child’s death the trust would be subject to the GSTT. The GSTT is a flat tax imposed at the highest marginal estate tax rate in effect in the year of the “skip.” Each individual transferor has an exemption from the GSTT. In 2025, the maximum GSTT exemption is $13.99 million. If you were to transfer property to a trust (by gift or upon death) and allocate your GSTT exemption to the total amount transferred, the property transferred to the trust and all of the appreciation would be exempt from the GSTT (and future estate tax) until the trust terminated (and was distributed to its beneficiaries) or some other power in the trust caused the property to be subject to a gift or estate tax.
But is it really possible to allow money to compound over long periods of time without reduction for estate and gift taxes? The answer is yes when the funds are held in a long-term trust. As described above, state law governs interests in property. Accordingly, each state has its own rules with respect to the duration of trusts. In some states, like New York, trusts must have an ending date. 21 In other states, like Florida, although trusts have ending dates, they are allowed a very long existence of 1,000 years (for trusts created on or after July 1, 2022); 22 and in other states, like Delaware, trusts can last “forever.” 23
The impact of transfer taxation (that is, the tax imposed on gifts, estates and generation-skipping transfers) can negatively impact the ability to build generational wealth. Consider the difference in results between transferring $1 million in cash to a 6 long-term trust exempt from the GSTT and $1 million in cash transferred outright (otherwise not exempt).
Although somewhat artificial, assume all of the money is invested and, with the exception of tax payments, none of it is spent. For purposes of this example, assume that investments return 5.5% per year, of which 1.5% is ordinary income taxed at 40.8%, and 4% is capital appreciation. Further assume the trust turns over 10% of its assets each year, on which a capital gains tax of 23.8% is paid (for ease of illustration, assume that assets sold have a pro rata share of tax basis). Finally, assume an estate tax of 40% would be imposed every 50 years on property that is not exempt from the GSTT. Of course, assets included in the gross estate of a decedent receive a step-up in basis to market value as of the date of death (or the alternate valuation date). Conversely, assets in a trust that are not subject to an estate tax would not receive such a step-up. The table shows the impact of avoiding a transfer tax at each generation.
Creditor protection
Taxes are not the only way family wealth can be diminished. Many other circumstances can cause a person to dissipate wealth. Individuals can make bad investments, lend money to friends who never pay them back, own a business that fails, get divorced, go bankrupt, or become addicted to drugs or alcohol. Long-term trusts can help preserve and protect inherited assets from future personal and business risks faced by the trusts’ beneficiaries.
It is customary for trusts to be made “spendthrift.” A spendthrift provision in the document creating a trust prevents a beneficiary’s creditors from attaching the assets of the trust to satisfy the beneficiary’s debt (including most court judgments). Spendthrift trusts are generally created by a settlor who is not also a beneficiary, although some states, such as Delaware and Ohio, allow spendthrift trusts to include the settlor as a beneficiary and shield trust assets from certain of the settlor’s creditors.
If the worst happens, the assets of the trust can help the beneficiary through hard times (for example, by directly paying for substance abuse rehabilitation) while protecting most of the principal from attachment by the beneficiary’s creditors.
Property of young beneficiaries
Generally, a minor may void any contract entered into before “the beginning of the day before the person’s eighteenth birthday.” 24 Therefore, as a practical matter, while a minor may “own” property, it is very difficult (if not impossible) for the minor to manage that property. Few, if any, adults would enter into an agreement with a minor as any agreement made with the minor may be invalidated by the minor.
There are many ways for minors to receive the benefit of property, while allowing an adult to manage the property. Property left directly to a minor may be managed by a court-appointed guardian until the minor attains majority (usually age 18). Another way is for the property to be owned in a Uniform Transfers to Minors Act25 or the Uniform Gifts to Minors Act account, over which an adult custodian manages the property until the minor attains majority (usually age 18 or 21, but in some cases age 25). 26 Each arrangement has drawbacks. For example, court-appointed guardians are supervised by the court that appointed them, and often must account to the court annually. In both cases, the property subject to the arrangement must be paid to the beneficiary at a very young age. Imagine, hundreds of thousands or even millions of dollars being paid to an 18-year-old.
Directing your property to be managed and administered by a trustee in trust for a minor beneficiary, allows you to set terms and conditions for the use of the property and to determine when, if ever, the property is distributed to the trust’s beneficiary. (See above for the benefits of using long-term trusts.)
Guidance is Available
There are many ways to use trusts in your estate planning. Trusts are flexible and customizable tools that can help you achieve your planning goals. However, because trusts are so flexible, expert advice is often necessary to determine how best to fit a trust (or different types of trusts) into your plan. Working with your lawyers, accountants and financial advisors, you can build a plan that best uses trusts to benefit your family. PNC has been serving as trustee for over one hundred years. If you would like to learn more about including trusts in your estate plan, contact any member of your PNC Private Bank team.
