The purpose of estate tax planning is to maximize the assets you pass on to future generations by minimizing gift and estate taxes. Estate-tax strategies revolve around the use of irrevocable trusts. This article discusses the most common types of irrevocable trusts that are used to minimize gift and estate tax: Intentionally Defective Grantor Trusts (IDGTs), Spousal Lifetime Access Trusts (SLATs), Non-Grantor Trusts, Irrevocable Life Insurance Trusts (ILITs), Crummey Trusts, and Grantor Retained Annuity Trusts (GRATs).

The Federal Estate Tax

The estate tax is a tax on the assets that a person leaves to their heirs when they pass away. The estates of U.S. citizens and residents are taxed on all of their worldwide assets — including real estate, retirement accounts, brokerage accounts, crypto, intellectual property, and whatever else a person owns. The federal estate tax rate is a flat 40%, and any tax is due within nine months of a person’s death.

There are three important exceptions to the estate tax.

First, each individual has a basic exclusion amount, sometimes called a lifetime exemption. The exemption is large; it’s the reason most Americans never owe any estate tax. In 2025, the exemption is $13.99 million. It is adjusted for inflation, so it usually increases on January 1. The estate tax exemption is expected is around $14 million in 2025, but under current law it is scheduled to be cut in half to about $7 million on January 1, 2026.

Second, amounts left to a person’s U.S. citizen spouse are not taxed. This prevents a surviving spouse from having to sell the family home or business to pay estate tax. However, when the surviving spouse dies, his or her estate (including the amount inherited from the deceased spouse) will be subject to estate tax.

Third, amounts left to charity are not taxed. Warren Buffett says he plans to leave the vast majority of his fortune to charity when he dies. That means that Buffett’s estate won’t be subject to much estate tax. Of course, most people want to leave the bulk of their estates to their family members.

It’s hard to overstate how important estate tax planning is for high-net-worth people. The federal estate tax is a serious obstacle to intergenerational wealth transfers. Under current law, the estate of a New Yorker who dies with $30 million in 2026 will owe around $10 million of state and federal estate tax. And yet, the estate of a billionaire New Yorker who dies in 2026 after doing careful estate tax planning may owe very little. That’s the power of estate tax planning.

What are trusts that help you avoid Estate Taxes?

Intentionally Defective Grantor Trust

An Intentionally Defective Grantor Trust (IDGT) is an irrevocable trust designed to remove assets from the grantor’s estate for estate tax purposes while keeping the grantor responsible for paying the income taxes associated with those assets. This allows the grantor to shift the value of assets (and their future appreciation) outside of their estate and reduce their estate further by paying the taxes on the income generated by the trust.

Core Use Case: IDGTs allow individuals who are over the gift and estate tax exemption amount, or expect to over the gift and estate tax exemption amount, to transfer assets to a trust that will yield substantial gift and estate tax savings over the long run.

Benefits:

1. Estate Tax Savings: The primary advantage of an IDGT is its ability to use a grantor’s lifetime gift-tax exemption to efficiently shift assets out of the grantor’s estate for estate-tax purposes. The grantor can pay the income tax on the trust’s income, effectively shifting even more wealth into the trust and out of the grantor’s estate. Finally, the grantor can lend to the trust free of any tax consequences — loans are another powerful tool that taxpayers use to shift wealth out of their estates.
2. Asset Protection: An IDGT, as a separate legal person, is generally not subject to liability for actions taken by a trust’s grantor or beneficiary. So the grantor’s or beneficiary’s creditors won’t be able to access the trust’s assets even if they win a lawsuit against the grantor or beneficiary. In addition to protecting assets from lawsuits, IDGTs can help shield inherited assets from a divorcing spouse.
3. Potential Income-Tax Savings: Although IDGTs don’t provide any immediate income-tax savings, they can indirectly save income tax down the line. That’s because an IDGT can make distributions to other taxpayers, who may be in lower tax brackets. The distribution itself will have no tax consequences, but when those taxpayers later sell the asset, they’ll pay less tax than the grantor would have paid, due to that lower tax bracket. IDGTs can also be transformed into “non-grantor trusts,” which can avoid state income tax.
4. Relative Liquidity: Compared to many other tax strategies, IDGTs have little impact on a grantor’s liquidity. Though the grantor will have transferred some portion of his or her assets to the trust, the grantor can borrow from the IDGT without any tax consequences. Moreover, if the grantor’s spouse is a beneficiary, he or she can receive distributions from the IDGT if necessary.

Trade-offs:

1. No State Income Tax Savings: IDGTs don’t save on state income tax
2. Irrevocability: When a grantor makes a gift to an IDGT, the gift is irrevocable (though the grantor can swap assets in and out of the trust at any time, as long as the swapped assets are exchanged for other assets with equal value).
3. No Direct Control: Typically the grantor does not act as trustee of the IDGT, though he or she can remove and replace the trustee at any time, lend money to or borrow money from the trust, get reimbursed by the trust for the trust’s tax liabilities (if the grantor doesn’t want to pay), and swap assets with the trust.

Non-Grantor Trust

A Non-Grantor Trust (NGT) is an irrevocable trust that is treated as a separate tax entity from the grantor.

Core Use Case: NGTs are used when the grantor wants to completely separate themselves from the trust for both estate and income tax purposes. It’s often used by individuals over the lifetime gift exemption located in high tax states and individuals looking to multiply QSBS exclusions.

Benefits:

1. Estate Tax Savings: Non-grantor trusts use a grantor’s lifetime gift tax exemption to efficiently shift assets out of the grantor’s estate for estate-tax purposes.
2. State Income Tax Savings. In California, the top marginal state income-tax rate is 13.3%. In New York City, the top rate is 14.776%. In South Dakota, the top marginal state income-tax rate is 0%. Setting up a non-grantor trust in a state like South Dakota, and then putting investments that generate lots of investment income inside of that trust, can save a grantor’s family a lot of income tax over time.
3. Asset Protection: A non-grantor trust, as a separate legal person, is generally not subject to liability for actions taken by a trust’s grantor or beneficiary. So the grantor’s or beneficiary’s creditors won’t be able to access the trust’s assets even if they win a lawsuit against the grantor or beneficiary. In addition to protecting assets from lawsuits, non-grantor trusts can help shield inherited assets from a divorcing spouse.
4. QSBS Stacking. For founders or early startup employees who have QSBS-eligible stock, perhaps the biggest benefit of non-grantor trusts is the additional QSBS exclusion they receive. Non-grantor trusts are eligible for their own $10 million QSBS exclusions — a single QSBS-stacking non-grantor trust can save a family millions of dollars of capital gains tax.

Trade-offs:

1. Illiquidity: When the grantor makes a gift to a non-grantor trust, he or she loses access to the assets in the trust. Unlike IDGTs some other trust types, with a non-grantor trust, the grantor cannot “swap” or borrow assets without income-tax consequences.
2. Spouse Cannot Be Beneficiary: Generally the grantor’s spouse cannot be the beneficiary of a non-grantor trust.
3. Potentially Higher Federal Tax Brackets: Non-grantor trusts are taxed at the highest federal tax bracket on annual income above a few thousand dollars. If the grantor is not a high-bracket taxpayer, gifting assets to a non-grantor trust may actually increase the effective federal tax rate paid on any income generated by assets inside the trust.
4. No Direct Control: The grantor cannot act as trustee of the non-grantor trust, though he or she can remove and replace the trustee at any time.

Spousal Lifetime Access Trust

A Spousal Lifetime Access Trust (SLAT) is a type of IDGT created by one spouse for the benefit of the other spouse and, typically, their descendants.

Core Use Case: SLATs are used to remove assets from a couple’s combined estate while still allowing indirect access to the trust assets through the spouse that isn’t the grantor.

Benefits:

1. Estate Tax Savings: The primary advantage of a SLAT is its ability to use a grantor’s lifetime gift tax exemption to efficiently shift assets out of the grantor’s estate for estate-tax purposes. The grantor can pay the income tax on the trust’s income, effectively shifting even more wealth into the trust and out of the grantor’s estate. Finally, the grantor can lend to the trust free of any tax consequences — loans are another powerful tool that taxpayers use to shift wealth out of their estates.
2. Asset Protection: A SLAT, as a separate legal person, is generally not subject to liability for actions taken by a trust’s grantor or beneficiary. So the grantor’s or beneficiary’s creditors won’t be able to access the trust’s assets even if they win a lawsuit against the grantor or beneficiary. In addition to protecting assets from lawsuits, SLATs can help shield inherited assets from a divorcing spouse.
3. Liquidity and Indirect Access: Compared to many other tax strategies, SLATs have little impact on a grantor’s liquidity. Though the grantor will have transferred some portion of his or her assets to the trust, the grantor can borrow from the SLAT without any tax consequences. Moreover, the grantor’s spouse can receive distributions from the SLAT if necessary.

Trade-offs:

1. Separate Property: SLATs must be funded with the grantor’s sole and separate property — if a SLAT is funded with the spouse’s property, the SLAT will fail to avoid estate tax (at least in part). Since many couples own most of their property jointly or as community property, this can be a problem. Where it is a problem, both spouses must agree in advance of the SLAT being funded that the property that’s funding the SLAT is the grantor’s separate property. Understandably, sometimes married couples aren’t comfortable signing documents that transfer property from one spouse to another.
2. Irrevocability: When a grantor makes a gift to a SLAT, the gift is irrevocable (though the grantor can swap assets in and out of the trust at any time, as long as the swapped assets are exchanged for other assets with equal value).
3. No Direct Control: Typically the grantor does not act as trustee of the SLAT, though he or she can remove and replace the trustee at any time, lend money to or borrow money from the trust, get reimbursed by the trust for the trust’s tax liabilities (if the grantor doesn’t want to pay), and swap assets with the trust.

Irrevocable Life Insurance Trust

An Irrevocable Life Insurance Trust (ILIT) is a type of trust specifically designed to hold and hold life insurance policies.

Core Use Case: ILITs are used to remove life insurance proceeds from the insured’s taxable estate while providing liquidity for estate taxes and other expenses.

Benefits:

1. Estate Tax Savings: The primary advantage of an ILIT is that it can shelter the proceeds of life insurance policies from estate tax upon the grantor’s death. Since the federal estate rate is 40% and in some states the effective state and federal estate tax rates are as high as 52%, this is an important benefit. When PPLI and ILITs are used in conjunction, the combined tax savings can be quite significant.
2. Asset Protection: An ILIT, as a separate legal person, is generally not subject to liability for actions taken by a trust’s grantor or beneficiary. So the grantor’s or beneficiary’s creditors won’t be able to access the trust’s assets even if they win a lawsuit against the grantor or beneficiary. In addition to protecting assets from lawsuits, ILITs can help shield inherited assets from a divorcing spouse.
3. GST Efficiency: A person can allocate generation-skipping transfer (”GST”) tax exemption to an ILIT when the trust is first funded. As a result, the ILIT is a popular form of dynasty trust.

Trade-offs:

1. Cash Funding: ILITs are typically funded with cash or cash equivalents so that the ILIT can pay large upfront insurance premiums. If an ILIT is funded with an appreciated asset, that asset will likely need to be sold in order to pay the insurance premiums.
2. Irrevocability: When a grantor makes a gift to an ILIT, the gift is irrevocable.
3. No Direct Control: Typically the grantor does not act as trustee of the ILIT, though he or she can remove and replace the trustee at any time.

Trusts that Don’t Use Gift Tax Exemption

Crummey Trust

A Crummey Trust allows grantors to make gifts to an irrevocable trust while qualifying for the annual gift tax exclusion.

Core Use Case: Crummey Trusts are used to transfer assets to beneficiaries over time while minimizing gift taxes and maintaining some control over the assets.

Benefits:

1. Estate Tax Savings: The primary advantage of a Crummey Trust is its ability to transfer assets to a grantor’s beneficiaries free of gift tax or estate tax.
2. Asset Protection: A Crummey Trust, as a separate legal person, is generally not subject to liability for actions taken by a trust’s grantor or beneficiary. So the grantor’s or beneficiary’s creditors won’t be able to access the trust’s assets even if they win a lawsuit against the grantor or beneficiary. In addition to protecting assets from lawsuits, Crummey Trusts can help shield inherited assets from a divorcing spouse.
3. Relative Liquidity: Compared to many other tax strategies, Crummey Trusts have little impact on a grantor’s liquidity. As long as the trust is a grantor trust, the grantor can borrow from the trust or swap assets with the trust without any tax consequences.
4. Series of Smaller Gifts: Some people prefer making lots of small annual gifts versus making a few large gifts, since the smaller gifts are less noticeable and less likely to have a significant immediate impact on the grantor’s financial situation.

Trade-offs:

1. Irrevocability: When a grantor makes a gift to a Crummey Trust, the gift is irrevocable.
2. Not Ideal for Illiquid Assets: Crummey Trusts work very well when funded with liquid assets, but they are often not the best fit for gifts of illiquid assets, like real estate or privately held stock. When gifting illiquid assets to an irrevocable trust, it’s important to get the assets appraised for tax purposes. Appraisals cost money. The cost of an appraisal is negligible when the asset being gifted is worth millions of dollars, but it can be quite significant if the asset is only worth $15,000. Liquid assets like public stock don’t need to be appraised at all.
3. No Direct Control: Typically the grantor does not act as trustee of a Crummey Trust, though he or she can remove and replace the trustee at any time.

Grantor Retained Annuity Trust

A Grantor Retained Annuity Trust (GRAT) is an estate planning tool used to minimize taxes on large financial gifts to family members.

Core Use Case: GRATs are primarily used to transfer appreciation on assets to beneficiaries with minimal gift tax consequences.

Benefits:

1. Estate Tax Savings: The primary advantage of a GRAT is its ability to transfer assets to a grantor’s beneficiaries free of gift tax or estate tax.
2. Ideal for Volatile Assets: Compared to other estate-tax strategies, GRATs are particularly well suited for transferring highly volatile assets. In fact, GRATs thrive on volatility. On average, a GRAT funded with highly volatile assets will generally outperform a GRAT funded with less volatile assets even if the overall percentage growth of the underlying assets is the same.
3. Downside Protection: If GRATs had a motto, it would be “Heads, you win, tails you don’t lose.” A GRAT funded with an asset that drops in value will fail to pass on assets to the beneficiaries, but that failure won’t leave the beneficiaries any worse off than they would have been if the GRAT hadn’t been created. In contrast, with other estate-tax strategies, transferring assets that later drop in value can be tax inefficient.
4. Relative Liquidity: Compared to many other tax strategies, GRATs have little impact on a grantor’s liquidity. During the term of the GRAT, a portion of the grantor’s assets are in the trust, but the grantor can always borrow from the GRAT without any tax consequences.

Trade-offs:

1. GST Inefficiency: A person cannot allocate generation-skipping transfer (”GST”) tax exemption to a GRAT during the annuity period. This makes GRATs less suited to transferring assets to grandchildren or more distant descendants than intentionally defective grantor trusts or other dynasty trusts. Still, GRATs can be a powerful estate-tax strategy alongside other, more GST-efficient strategies.
2. Not Ideal for Illiquid Assets: GRATs work very well when funded with liquid assets, but they are often not the best fit for gifts of illiquid assets, like real estate or privately held stock. Illiquid assets in a GRAT will need to be valued at least three different times (upon funding, upon the first anniversary of funding, and upon the second anniversary of funding). The IRS can potentially challenge each valuation. In contrast, liquid assets like public stock don’t need to be appraised at all.

Conclusion

Irrevocable trusts are powerful vehicles for managing and transferring wealth while minimizing tax liabilities. Each type of trust serves specific purposes and comes with its own set of benefits and trade-offs. IDGTs and NGTs focus on asset transfer and estate tax reduction, with IDGTs offering unique income tax advantages. ILITs and Crummey Trusts provide specialized solutions for life insurance and gift tax planning, respectively. GRATs and SLATs offer sophisticated wealth transfer strategies, with GRATs excelling in transferring asset appreciation and SLATs providing a balance of estate tax reduction and continued access to assets.

When considering these trust options, it’s crucial to evaluate your specific financial situation, goals, and family dynamics. By carefully selecting and implementing the right combination of trusts, you can create a comprehensive estate plan that protects your assets, minimizes taxes, and provides for your beneficiaries according to your wishes.

About Valur

We’ve built a platform to give everyone access to the tax and wealth-building tools typically reserved for wealthy individuals with a team of accountants and lawyers. We make it simple and seamless for our customers to take advantage of these hard-to-access tax-advantaged structures. With Valur, you can build your wealth more efficiently at less than half the cost of competitors. 

From picking the best strategy to taking care of all the setup and ongoing overhead, we make things simple. The results are real: We have helped create more than $3 billion in additional wealth for our customers. If you would like to learn more, please feel free to explore our Learning Center. You can also see your potential tax savings with our online calculators or schedule a time to chat with us!