There appears to be a misconception among financial planning professionals and accountants about the impact of “estate” or “inheritance” taxes on a decedent’s estate. Some professionals have suggested that an irrevocable trust will help avoid such taxes. In some limited circumstances that may be true. However, you only need to try to avoid taxes if your estate may be subject to such taxes.
The most common form of potential taxes on an estate when a person dies are federal estate taxes and state inheritance taxes. As of 2024, if your estate does not exceed $13.6 million dollars (or $27.22 million dollars for a married couple) there is no liability from federal estate taxes. That exemption may be reduced to about $7 million dollars in 2025 if Congress does not extend the exemption.
Nevertheless, unless you have assets that exceed several million dollars, there is no federal estate tax.
In Kentucky and Indiana, assets which pass to spouses, children and siblings at death, are free from inheritance tax—regardless of the amount. Bequests to nonprofits are also free from state inheritance tax. Bequests which pass to others may be subject to state inheritance tax but at a lower rate that often is nominal.
The bottom line is that unless your assets excess $7million dollars, there may be no tax to avoid and the cost—and restrictions- of an irrevocable trust may have no impact on taxes at death.