This is the next article in the series on the benefits of a revocable living trust as an estate planning tool.  In our previous post, we delved into the difference between a revocable and irrevocable living trust.  While a revocable living trust provides control over your assets and can be canceled or altered anytime, an irrevocable trust once established, cannot be revoked or altered; the asset is then removed from your estate causing you to lose control over them.  In this article, we will briefly discuss the federal tax implications and their interplay with a revocable living trust. There seems to be a common misconception that a revocable living trust is used as an estate planning vehicle to obtain tax benefits.  This article aims to clarify this issue.  The last article also discussed the importance of hiring an estate planning attorney who can assess your situation and make recommendations tailored to you.  If you or a loved one need assistance with a revocable living trust, get in touch with us online or by telephone to speak to a wills and trusts attorney.

What are estate taxes and who has to pay them?

Estate tax, also referred to as death tax or inheritance tax is a tax on the total value of assets and property owned by you at the time of your death.  It is calculated based on an individual’s net worth.  The tax is paid before the remaining assets can be transferred to the designated heirs or beneficiaries according to the deceased person’s will or Oklahoma laws of intestacy.  It’s important to note that an inventory is taken of the decedent’s entire estate including cash, securities, real estate, insurance, trusts, annuities, business interests, and other assets.  This means all assets, even those passing to beneficiaries outside the probate process are included in the gross estate.  For instance, typical assets that avoid probate proceedings like a life insurance payout, transfer to trust beneficiaries, joint tenancy transfers, and business interests are all included in the gross estate.  The good news is that Oklahoma does not impose state estate tax, and the majority of Oklahomans won’t be subject to federal estate tax.  An estate becomes liable for federal estate taxes only if its value exceeds the filing threshold, which stands at $12.9 million for the year 2023.  However, it’s essential to clarify that a revocable living trust won’t help you avoid federal estate taxes. For this purpose, an irrevocable trust (distinct from a revocable trust) would be more suitable. Refer to our previous article on the differences between revocable and irrevocable living trusts for further insights.

Do I still have to pay federal estate taxes if I have a revocable living trust?

As discussed above, Oklahoma does not levy estate taxes.  But if the total value of your estate exceeds a specific limit, you will be subject to federal estate tax, irrespective of whether assets transfer through a will or a trust upon your death.  While a revocable living trust offers various benefits such as probate avoidance, guardianship proceedings avoidance, privacy, and handling of assets for minors or incompetents, avoiding federal estate tax is not one of them.  If your estate’s value exceeds $12.9 million, the federal threshold for the year 2023, your estate will be subject to federal estate tax.  To reiterate, a revocable living trust won’t exclude your trust assets from the taxable estate, making your estate liable for the federal estate tax, but only if its value exceeds the yearly threshold.  Therefore, it is crucial to pay close attention to the threshold amount for a particular year to determine whether your estate may be subject to federal estate tax.

If you or a loved one is considering creating a revocable living trust, we are here to help.  Our team will guide you through the process to ensure that your estate plan accurately reflects your wishes, ultimately easing the burden on your loved ones after your passing.  Please contact us online or by telephone to get in touch with an estate planning firm and speak to a wills and trusts lawyer.  We proudly serve Oklahoma County, Logan County, Cleveland County, and Grady County.