Most people who create a living trust are done with estate planning. They have a will, a trust, a power of attorney, and a healthcare directive. That is a complete basic plan, and for the majority of estates it is all that is needed. But for larger estates, particularly those approaching or exceeding the federal estate tax exemption, the basic plan is just the foundation. The structures described here sit on top of it, each designed to accomplish something the basic documents cannot: moving assets out of a taxable estate while retaining some economic benefit, transferring wealth across multiple generations without triggering tax at each transfer, or removing future appreciation from an estate before it compounds into a larger tax problem.
These strategies are used by estate planning attorneys for clients with significant assets. Understanding how they work gives you a clearer picture of what is available and what questions to ask when the time comes.
The estate tax landscape in 2026
The federal estate tax applies to estates above the exemption threshold, which is $13.61 million per person in 2026 (indexed for inflation). Married couples can combine their exemptions through a portability election, effectively shielding up to $27.22 million from federal estate tax. Estates above that threshold are taxed at rates up to 40%.
The current high exemption is a product of the Tax Cuts and Jobs Act of 2017, which roughly doubled the prior exemption. That provision is scheduled to sunset at the end of 2025 unless Congress acts, which would reduce the exemption back to approximately $7 million per person (inflation-adjusted). The political uncertainty around this sunset has made 2025 and 2026 an active period for estate planning, particularly for estates between $7 million and $14 million that would be unaffected under current law but potentially exposed if the exemption drops.
State estate taxes add another layer. Twelve states and the District of Columbia impose their own estate taxes, often with much lower exemptions than the federal threshold. Massachusetts and Oregon have exemptions as low as $1 million. A family with a $5 million estate may owe nothing federally but face a meaningful state estate tax bill depending on where they live.
Grantor Retained Annuity Trusts (GRATs)
A Grantor Retained Annuity Trust (GRAT) is a technique for transferring the future appreciation of assets to heirs with little or no gift tax. The mechanics: the grantor transfers assets into an irrevocable trust and retains the right to receive a fixed annuity payment for a set term, typically two to ten years. At the end of the term, whatever remains in the trust passes to the beneficiaries.
The tax efficiency comes from how the IRS calculates the gift. The gift is valued at the time of transfer as the difference between what was put in and the present value of the annuity payments the grantor will receive back. If the GRAT is structured so that the annuity payments roughly equal the transferred assets plus a statutory interest rate (called the Section 7520 rate), the taxable gift is close to zero. This is called a "zeroed-out GRAT." If the assets inside the trust grow faster than the Section 7520 rate, that excess growth passes to the beneficiaries tax-free.
The main risk: if the grantor dies during the GRAT term, the assets return to the taxable estate. For that reason, GRATs work best with shorter terms and healthier grantors. Rolling GRATs, where short-term trusts are stacked in sequence, are a common technique for managing this mortality risk while capturing appreciation incrementally.
GRATs are particularly effective with assets expected to appreciate significantly: closely held business interests, pre-IPO stock, real estate with growth potential. They work poorly with assets that appreciate slowly or lose value, since the annuity payments still need to be made regardless of performance.
Irrevocable Life Insurance Trusts (ILITs)
Life insurance proceeds paid to a beneficiary are generally income-tax-free. But if the deceased owned the policy at death, the proceeds are included in their taxable estate. For large policies, that inclusion can trigger a significant estate tax bill on money that was supposed to pass intact to heirs.
An Irrevocable Life Insurance Trust (ILIT) solves this by removing the policy from the taxable estate. The trust owns the policy rather than the insured. When the insured dies, the proceeds are paid to the trust and distributed to the beneficiaries according to the trust's terms, outside the taxable estate entirely.
Setting up an ILIT requires care. The insured cannot retain any "incidents of ownership" over the policy, such as the right to change beneficiaries, borrow against the cash value, or surrender the policy. If the insured transfers an existing policy to the ILIT rather than having the trust purchase a new one, there is a three-year lookback rule: the proceeds will still be included in the estate if the insured dies within three years of the transfer.
ILITs are commonly funded through annual gifts from the grantor to the trust, which the trustee uses to pay premiums. To qualify for the annual gift tax exclusion ($18,000 per recipient in 2024), the trust must give beneficiaries a temporary right to withdraw the gift before the trustee uses it to pay the premium. This is called a Crummey notice, and sending it correctly is a procedural requirement that trips up poorly administered ILITs.
Dynasty Trusts
A dynasty trust is a long-term trust designed to hold assets across multiple generations, potentially in perpetuity, without triggering estate tax at each generational transfer. Under normal circumstances, assets passed from grandparent to parent to grandchild would be subject to estate tax at each death. The generation-skipping transfer (GST) tax was specifically designed to prevent wealthy families from bypassing this by skipping a generation.
Dynasty trusts work by using the grantor's GST tax exemption (equal to the estate tax exemption, currently $13.61 million) to fund a trust that is exempt from GST tax. Assets inside the trust can benefit multiple generations without triggering either estate tax or GST tax as long as they remain in the trust. The trust can make distributions to children, grandchildren, and great-grandchildren according to the trustee's discretion or the trust's distribution standards.
The longevity of a dynasty trust depends on state law. Most states historically had a "rule against perpetuities" limiting trust duration to around 90 years. A number of states, including South Dakota, Delaware, Nevada, and Alaska, have abolished or significantly extended this limit, allowing truly perpetual trusts. These states have become popular siting choices for dynasty trusts precisely because of their favorable laws, even for grantors who do not live there.
Spousal Lifetime Access Trusts (SLATs)
A Spousal Lifetime Access Trust (SLAT) allows one spouse to make a gift to an irrevocable trust for the benefit of the other spouse (and often their descendants), removing the assets from the taxable estate while the beneficiary spouse retains access to the trust's income and principal during their lifetime.
The appeal is that SLATs allow a married couple to use their gift tax exemption to remove assets from their combined taxable estate without giving up access to those assets entirely. As long as the beneficiary spouse is alive and the marriage is intact, the assets remain accessible through trust distributions.
The risks are structural. If the beneficiary spouse dies first, the surviving spouse loses access to the trust assets, which now benefit the next generation. If the couple divorces, the same loss of access occurs. And if both spouses create SLATs for each other (called reciprocal SLATs), the IRS may invoke the reciprocal trust doctrine to collapse both trusts, treating them as if each spouse created a trust for themselves rather than for each other, which eliminates the estate tax benefit.
Intentionally Defective Grantor Trusts (IDGTs)
An Intentionally Defective Grantor Trust (IDGT) is irrevocable for estate tax purposes but treated as the grantor's own trust for income tax purposes. That deliberate mismatch is the source of its name and its utility.
Because the grantor is treated as the owner for income tax purposes, the grantor pays income tax on the trust's earnings rather than the trust paying it. This has two effects. First, the grantor's payment of the income tax is itself a tax-free gift to the trust beneficiaries, since it reduces the grantor's estate without triggering gift tax. Second, the trust assets grow without being depleted by income tax, compounding faster for the beneficiaries.
IDGTs are commonly used to sell appreciated assets to the trust in exchange for a promissory note. Because grantor trusts are disregarded for income tax, the sale is not a taxable event. The grantor receives interest payments on the note, the assets appreciate inside the trust outside the taxable estate, and at the end of the note term the remaining appreciation belongs to the beneficiaries.
Qualified Personal Residence Trusts (QPRTs)
A Qualified Personal Residence Trust (QPRT) is a technique for transferring a personal residence or vacation home out of the taxable estate at a reduced gift tax cost. The grantor transfers the home to an irrevocable trust but retains the right to live in it for a set term, typically five to fifteen years. At the end of the term, the home passes to the beneficiaries, often the grantor's children.
The gift tax is calculated at the time of transfer based on the present value of the remainder interest, which is less than the full value of the home because the grantor is retaining occupancy for the term. The longer the retained term, the lower the taxable gift. But the longer the term, the higher the risk that the grantor dies before it ends, which would pull the home back into the taxable estate at full value.
If the grantor wants to continue living in the home after the term ends, they must pay fair market rent to the trust. That rent payment is an additional transfer to the beneficiaries that is not subject to gift tax, making the ongoing rent a further wealth transfer mechanism. QPRTs work best in low-interest rate environments, when the discount on the remainder interest is more favorable.
A real-world example
A retired couple in California has a combined estate of $22 million, primarily a closely held business interest, their home, and investment accounts. They have already created a basic revocable living trust and funded it. With the TCJA exemption sunset approaching, their estate planning attorney recommends a three-part strategy: a zeroed-out GRAT funded with the business interest to capture expected appreciation before a planned sale, an ILIT to hold a $5 million survivorship life insurance policy and remove the proceeds from both estates, and a SLAT funded by the husband to benefit the wife and their children using a portion of his remaining gift tax exemption. Together these moves reduce their projected taxable estate by roughly $8 million before the business sale, with the GRAT transferring any appreciation above the Section 7520 rate to their children tax-free.
Where to start: the foundation before the advanced strategies
None of these structures replace a basic estate plan. GRATs, ILITs, and dynasty trusts are built on top of a will, a revocable living trust, powers of attorney, and healthcare directives. For estates that are not yet at the advanced planning stage, or for families who want to get the foundation in order before meeting with an attorney about more sophisticated strategies, Quicken WillMaker & Trust by Nolo covers the complete basic estate plan in one package: will, living trust, power of attorney, healthcare directive, and transfer-on-death deed. Getting that foundation right is the prerequisite for everything described above.
Frequently Asked Questions
How much does it cost to set up a GRAT or dynasty trust?
These structures require an experienced estate planning attorney and typically cost $5,000 to $20,000 or more in legal fees depending on complexity. Ongoing administration, including trustee fees, accounting, and tax filings, adds recurring cost. The economics only make sense for estates large enough that the tax savings significantly exceed the setup and administration costs. A general rule of thumb: advanced trust strategies become cost-effective when the estate tax exposure being addressed is at least ten times the cost of implementation.
What happens to a GRAT if the grantor dies during the term?
If the grantor dies before the GRAT term ends, the assets in the trust are pulled back into the taxable estate as if the GRAT had never been created. The estate is in no worse position than if it had done nothing, but the planning opportunity is lost. This mortality risk is why GRATs are typically structured with short terms (two to three years) and why planners sometimes use rolling GRATs to spread the risk across multiple short-term trusts rather than one long one.
Can these strategies still work after the TCJA exemption sunsets?
Yes, but the urgency changes. If the estate tax exemption drops from $13.61 million to approximately $7 million per person, the population of estates with federal estate tax exposure grows significantly. The strategies described here become more valuable, not less, in that environment. The window to use the current high exemption through completed gifts before the sunset is what is driving activity now. Gifts made using the current exemption are not clawed back if the exemption later decreases, according to IRS regulations issued in 2019.
Do these trusts work in every state?
The federal tax treatment of GRATs, ILITs, and similar structures is governed by federal law and applies uniformly across states. State income tax treatment varies: some states tax grantor trusts differently from federal treatment. The siting of dynasty trusts matters significantly because state law governs trust duration and some states are much more favorable than others. South Dakota, Delaware, Nevada, and Alaska are the most commonly used states for dynasty trusts because of their favorable perpetuities laws, directed trust statutes, and lack of state income tax on trust income in some cases.
What is the difference between a dynasty trust and a generation-skipping trust?
A generation-skipping trust (GST trust) is any trust that skips a generation for tax purposes, using the grantor's GST exemption to avoid the generation-skipping transfer tax. A dynasty trust is a specific type of GST trust designed to last for many generations, potentially in perpetuity, by taking advantage of favorable state laws on trust duration. All dynasty trusts are GST trusts, but not all GST trusts are dynasty trusts. A GST trust might skip one generation and terminate; a dynasty trust is designed to keep assets in trust indefinitely across as many generations as state law allows.