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- Avail Investment Partners
- Oct 15
- 8 min read
Updated: Oct 29
A family’s estate worth millions can vanish in a generation if the transition is handled poorly. We have seen heirs fight over assets, estates lose half their value to taxes, and privacy disappear in probate court. The difference between those outcomes and a smooth, tax-efficient transfer often comes down to one tool: the trust.
This post explains what trusts are, how they work, and why they have become a cornerstone of modern estate and tax planning for business owners and affluent families.
How a Trust Works
A trust is a legal arrangement that allows one party, the trustee, to hold and manage assets for the benefit of others, the beneficiaries, under the terms set by the creator, the grantor. The trust document defines the rules for what can be distributed, when, and under what conditions.
Core components:
Grantor: Creates and funds the trust.
Trustee: Manages the assets and carries out the terms.
Beneficiaries: Receive income or assets from the trust.
Trust Agreement: The written instructions that govern it all.
When assets are transferred into a trust, ownership changes hands. The trustee becomes the legal owner, but only for the purpose of managing the property according to the grantor’s intent. This separation of ownership gives trusts their power for protection, control, and tax efficiency.
Why Trusts Matter
Trusts serve families who want to control how wealth is used, reduce taxes, and protect loved ones from risk. They are not just for the ultra-wealthy or business owners, they are for anyone who wants their assets to be managed and distributed with clarity and purpose.
1. Asset Protection
Assets held in properly structured trusts are generally shielded from creditors, lawsuits, or divorce claims. For example, a child’s inheritance can be protected from a future ex-spouse or business liability. The key is that the assets are owned by the trust, not the individual.
2. Estate Tax Reduction
The One Big Beautiful Bill Act (OBBBA) of 2025 made the higher estate and gift tax exemption permanent and increased it to $15 million per person (or $30 million for married couples) beginning January 1, 2026, with future inflation adjustments(1).
That means fewer families will face federal estate tax, but for those who do, the stakes remain high. Trusts remain one of the most effective ways to reduce or eliminate estate tax exposure. By transferring appreciating assets into irrevocable trusts, families can remove future growth from their taxable estate.
For example, moving $10 million of growth assets into a properly structured trust could save roughly $4 million in future estate taxes, assuming a 40 percent federal rate(2). Even for families below the exemption threshold, trusts can help manage state-level estate taxes, which often begin at much lower levels(3).
3. Control Beyond Life
Trusts allow you to set conditions for how and when beneficiaries receive assets. You can stagger distributions by age, tie them to milestones, or provide lifetime income with professional oversight. This structure helps preserve wealth across generations rather than distributing it all at once.
4. Privacy and Probate Avoidance
A will becomes public record when probated. A trust generally does not. That privacy can be valuable for families who prefer discretion or own property in multiple states, where probate can be slow and expensive.
5. Family Continuity
Trusts can keep assets professionally managed long after the grantor’s death. This continuity helps maintain investment discipline and family governance, especially when multiple heirs are involved or when a surviving spouse needs support managing complex assets.
Revocable vs. Irrevocable Trusts
The two main categories of trusts differ in how much control and tax benefit they provide.
Feature | Revocable Trust | Irrevocable Trust |
Control | Full | Limited |
Tax Benefits | Minimal | Significant |
Creditor Protection | None | Strong |
Probate Avoidance | Yes | Yes |
Ideal Use | Lifetime Control | Estate & Tax Planning |
Revocable Living Trust (RLT)
A revocable trust is primarily used to avoid probate and manage assets during incapacity. The grantor retains full control and can amend or revoke it at any time. For tax purposes, the assets remain part of the grantor’s estate.
Example: A couple creates a joint revocable trust to hold their home and investment accounts. If one spouse becomes incapacitated, the other can continue managing everything without court involvement.
Irrevocable Trust
An irrevocable trust transfers ownership out of the grantor’s estate. Once established, it is difficult to change, but it offers stronger protection and potential estate tax savings. The trust often becomes a separate taxpayer, depending on its structure and elections.
Example: A parent transfers investment assets into an irrevocable trust to remove future appreciation from the estate while providing long-term support for children or grandchildren.
Common Trust Structures and Their Strategic Uses
1. Spousal Lifetime Access Trust (SLAT)
A SLAT allows one spouse to gift assets to a trust for the benefit of the other, removing them from the taxable estate while maintaining indirect access through the beneficiary spouse. The trust is irrevocable, meaning the assets are no longer owned by the grantor, but the couple can still benefit from them through distributions to the spouse.
Who it fits: Married couples with estates exceeding the new $15 million per-person exemption who want to use their lifetime exemption without losing flexibility.
Example: A couple transfers $20 million into a SLAT. The assets grow to $32 million over time. Because the growth occurs outside their estate, they avoid roughly $4.8 million in estate taxes at a 40 percent rate.
Key benefit: Estate reduction without losing lifestyle flexibility.
2. Irrevocable Life Insurance Trust (ILIT)
An ILIT owns a life insurance policy so that the death benefit is excluded from the taxable estate. The trust receives the proceeds and can use them to pay estate taxes or provide liquidity to heirs. This is especially valuable when the estate includes illiquid assets such as real estate or a closely held business.
Who it fits: Families with significant real estate or business interests that would be difficult to sell quickly upon death.
Example: A family owns a $25 million business and a $10 million commercial property. Both are illiquid, but the estate could owe $14 million in taxes. By holding a $15 million life insurance policy inside an ILIT, the death benefit passes outside the estate and provides immediate liquidity to pay taxes without forcing a sale of the property or business.
Key benefit: Keeps insurance proceeds outside the estate and provides liquidity for taxes on illiquid assets.
3. Intentionally Defective Grantor Trust (IDGT)
An IDGT is “defective” for income tax purposes but effective for estate tax planning. The grantor pays the income tax on trust earnings, allowing the trust to grow faster for beneficiaries. The trust can purchase appreciating assets from the grantor in exchange for a promissory note, freezing the estate value while shifting future growth out of the estate.
Who it fits: Families transferring appreciating assets such as real estate, investment portfolios, or business interests.
Example: A parent sells $8 million of business interests to an IDGT in exchange for a note. Over ten years, the assets grow to $14 million. The $6 million of appreciation escapes estate tax, saving about $2.4 million in taxes(4).
Key benefit: Freezes estate value while shifting future growth tax-free to heirs.
4. Grantor Retained Annuity Trust (GRAT)
A GRAT lets the grantor transfer assets expected to appreciate while retaining an annuity stream for a set term. If the assets outperform the IRS interest rate, the excess passes to beneficiaries with little or no gift tax. The trust is often used for concentrated stock positions or pre-liquidity business interests.
Who it fits: Individuals with assets likely to appreciate faster than the IRS Section 7520 rate.
Example: A $5 million GRAT invested in growth assets earns 8 percent annually while the IRS rate is 4.6 percent. After a 10-year annuity term, roughly $1.6 million passes to heirs free of gift and estate tax(5).
Key benefit: Low risk estate freeze technique that can be repeated over time.
5. Charitable Trusts (CRT and CLT)
Charitable trusts combine philanthropy with tax strategy.
Charitable Remainder Trust (CRT): Provides income to the donor or family for life, with the remainder going to charity. The donor receives an immediate charitable deduction and removes the remainder value from the estate.
Charitable Lead Trust (CLT): Pays income to charity for a term, then passes the remainder to heirs. The donor receives a partial deduction and reduces the taxable estate.
Who it fits: Families with charitable goals or large liquidity events.
Example: An older couple owns a fully depreciated commercial property worth $6 million. They live off the rental income, but it no longer meets their needs. Selling the property outright would trigger a large capital gain. By transferring the property into a CRT, they can sell it tax-deferred, reinvest the proceeds into a diversified portfolio, and receive lifetime income. If the CRT pays them 6 percent annually, they could receive $360,000 per year while supporting their chosen charity at the end of their lives.
Key benefit: Converts illiquid, low-yield property into diversified income while avoiding immediate capital gains tax and supporting charitable goals.
6. Dynasty Trust
A dynasty trust is designed to last for multiple generations, often using the generation-skipping transfer (GST) exemption to avoid estate taxes for as long as state law allows. The trust can hold investments, real estate, or business interests and distribute income to descendants under defined terms.
The advantage becomes clear when your children are already financially secure. Instead of leaving assets directly to them, where they would be taxed again at their deaths, the dynasty trust allows those assets to bypass their estates entirely. The trust can provide income or distributions for education, home purchases, or business ventures for grandchildren and beyond, all while remaining outside the estate tax system.
Who it fits: Families focused on long term legacy and asset protection.
Example: A $10 million dynasty trust grows at 6 percent annually for 40 years. Without estate taxes at each generation, the trust could exceed $100 million, compared to roughly $45 million if taxed at each generational transfer(6). The children can still benefit from the trust during their lifetimes, but the assets remain protected and compounding for future generations.
Key benefit: Compounds wealth outside the estate tax system for decades while supporting multiple generations.
Coordinating Trusts with Broader Financial Planning
Trusts work best when integrated into a comprehensive plan that aligns estate, tax, and investment strategies.
Example flow: A family sells appreciated stock, funds a SLAT for estate reduction, then establishes a dynasty trust for long term growth, with a charitable trust supporting their foundation.
Guardrails & cautions:
Choose a trustee with independence, fiduciary experience, and continuity.
Review trust administration annually for compliance and tax filings.
Confirm state law flexibility before selecting situs.
Coordinate with your CPA and estate attorney to align timing and reporting.
Important mechanics:
In some states, such as Texas, modern trust laws allow directed trusts, giving families flexibility to separate investment and administrative roles. This structure can improve oversight and reduce conflicts.
Common Misconceptions About Trusts
“Trusts are only for the ultra-wealthy.”
False. Many families use revocable trusts for privacy and probate avoidance, even with modest estates.
“I will lose all control over my assets.”
Not necessarily. Revocable trusts maintain full control, and even irrevocable trusts can be structured with powers of appointment or trustee replacement rights.
“They are too complex or expensive.”
The cost of a trust is often far less than the cost of probate, estate taxes, or family disputes. Complexity can be managed with clear documentation and professional guidance.
Conclusion
Trusts are not about control or complexity, they are about intention. A well-structured trust can protect assets, reduce taxes, and preserve family harmony long after the original wealth creator is gone.
The best results come from collaboration between your estate attorney, CPA, and financial advisor. Together they can align the legal, tax, and investment pieces into one cohesive plan that turns financial success into a lasting legacy.
Sources
One Big Beautiful Bill Act of 2025, Title IV, Subtitle B, Section 402.
Internal Revenue Service, “Estate and Gift Tax Overview,” https://www.irs.gov/businesses/small-businesses-self-employed/estate-and-gift-taxes
Forbes, “States With Inheritance or Estate Taxes (2025 Guide)” https://www.forbes.com/advisor/legal/estate-law/states-with-estate-tax/
Congressional Research Service, “Federal Estate, Gift, and Generation-Skipping Transfer Taxes,” https://www.nationalaglawcenter.org/wp-content/uploads/assets/crs/95-416.pdf
Internal Revenue Service, “Section 7520 Interest Rates,” https://www.irs.gov/retirement-plans/section-7520-interest-rates
Institute for Policy Studies, “Dynasty Trusts: How the Wealthy Shield Trillions from Taxation Onshore,” https://inequality.org/wp-content/uploads/2021/06/Dynasty-Trusts-Brief-June15-2021.pdf
Important Disclosures
Avail and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
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