How Trusts Can Help Minimize Estate Taxes and Protect Assets
Estate planning is a crucial part of managing your wealth and making sure that your wishes are honored after your death. In Maryland, like in many other states, one of the primary concerns for individuals and families with significant assets is how to reduce estate taxes and protect their assets for future generations.
One of the most effective legal tools for achieving these goals is the use of trusts.
At Sanders & Sanders, Attorneys at Law, we can help you work through your estate planning questions and design a comprehensive plan according to your goals. Here, we’ll discuss how trusts can help minimize estate taxes and safeguard assets in Maryland.
Maryland Estate Tax Overview
Maryland is one of the few states that imposes both an estate tax and an inheritance tax:
Estate tax: This tax is levied on the estate of a deceased person before the assets are distributed to heirs. As of 2025, the Maryland estate tax exemption is $5 million. Estates exceeding this value are subject to tax at a progressive rate, capped at 16%.
Inheritance tax: This is separate from the estate tax and is imposed on the recipient of certain inherited assets. The rate is 10%, but immediate family members (e.g., spouses, children, parents) are generally exempt.
The combination of these taxes can significantly reduce the amount passed on to beneficiaries if not planned for properly.
What Is a Trust?
A trust is a legal arrangement in which a grantor (the person creating the trust) transfers assets to a trustee, who manages the assets on behalf of beneficiaries according to the terms set in the trust document.
There are two broad categories of trusts:
Revocable trusts (Living trusts): These can be altered or revoked by the grantor during their lifetime. They become irrevocable at death.
Irrevocable trusts: Once established, these can’t be changed or dissolved without the consent of the beneficiaries. They offer significant tax and asset protection benefits.
Both types of trusts offer unique advantages depending on your financial goals and estate planning needs.
How Trusts Minimize Estate Taxes
Trusts are powerful tools in estate tax planning. Here’s how they can help reduce or even eliminate estate tax liability in Maryland:
Removing Assets from the Taxable Estate
Irrevocable trusts are especially effective in reducing estate taxes because once assets are transferred into the trust, they’re no longer considered part of the grantor’s taxable estate. This means they aren’t counted when calculating estate tax liability upon death.
Taking Advantage of the Estate Tax Exemption
Maryland’s estate tax exemption allows for a $5 million threshold (not indexed for inflation). Trusts can be used to structure estates so that each spouse fully utilizes their exemption, potentially sheltering up to $10 million from estate tax.
Generation-Skipping Transfer (GST) Tax Planning
Trusts can be structured to skip one or more generations, minimizing cumulative estate tax liability. A GST Trust avoids estate taxes at each generational level, allowing more wealth to be preserved for grandchildren or beyond.
Gift Tax and Annual Exclusion Gifts
By funding certain irrevocable trusts with annual exclusion gifts (up to $18,000 per beneficiary in 2024), grantors can gradually move wealth out of their estate over time without incurring federal gift tax, and without these gifts being subject to Maryland estate tax later.
By strategically utilizing various types of trusts, individuals can effectively minimize estate tax burdens, leverage exemptions, and preserve wealth across generations.
Types of Trusts That Help Reduce Estate Taxes in Maryland
Several types of trusts can be used in Maryland to minimize estate taxes:
Revocable living trusts: Don’t directly reduce estate taxes, but provide privacy, avoid probate, and form a foundation for more intricate estate tax planning.
Irrevocable life insurance trusts: Remove life insurance proceeds from the taxable estate.
Qualified personal residence trusts: Allow transfer of a primary or vacation home to a trust at a reduced gift tax cost while retaining the right to live in the home for a specified period.
Charitable remainder trusts: Let you transfer appreciated assets into the trust, receive an income stream, and then donate the remainder to charity, providing an immediate charitable deduction, avoiding capital gains tax, and removing the asset from your estate.
Grantor retained annuity trusts: Allow you to transfer assets to beneficiaries with little or no gift tax, particularly if the assets appreciate significantly, with the grantor retaining an annuity for a term of years and remaining assets going to beneficiaries outside the estate.
Dynasty trusts: Can last for generations, ideal for preserving family wealth and avoiding estate taxes at each generational level.
Understanding these trusts is crucial for effective estate planning in Maryland, helping individuals minimize tax liabilities and protect assets for future generations.
How Trusts Protect Assets
In addition to estate tax benefits, trusts are a cornerstone of asset protection. They offer several key ways to safeguard your assets.
First, trusts provide protection from creditors. Assets held within irrevocable trusts are no longer legally owned by the grantor, which makes them difficult for creditors to access.
Second, trusts can shield assets from lawsuits. They can be structured to limit exposure to legal claims, which is particularly beneficial for professionals such as doctors and lawyers, as well as business owners.
Third, trusts help in preserving government benefits. Special Needs Trusts (SNTs), for example, allow families to leave assets to disabled loved ones without jeopardizing their eligibility for crucial programs like Medicaid or SSI.
Finally, trusts enable greater control over wealth distribution. They can be used to stagger distributions to heirs, preventing mismanagement and confirming the responsible use of inherited wealth.
Maryland-Specific Considerations
Though Maryland law doesn't provide as robust self-settled trust protections as states like Nevada or Delaware, residents can still benefit from irrevocable trusts or third-party spendthrift trusts. In many cases, Maryland residents create trusts in jurisdictions with stronger asset protection statutes.
If a trust leaves assets to non-exempt heirs (like nieces or friends), Maryland’s 10% inheritance tax applies. Proper planning through lifetime gifting or charitable trusts can mitigate this.
Common Mistakes to Avoid
Creating a trust isn’t enough—you must transfer ownership of your assets to the trust. Failing to fund the trust can render it ineffective.
It’s crucial to coordinate your trust with both federal and state laws. Federal estate tax laws differ from Maryland’s, and your estate plan must account for both to avoid complications.
Many people overlook the implications of life insurance. Unless properly owned via an Irrevocable Life Insurance Trust (ILIT), life insurance proceeds can trigger estate tax, diminishing the inheritance for your beneficiaries.
Improper trustee selection can lead to mismanagement or disputes. Choosing a family member with limited financial or legal experience, rather than someone with the necessary knowledge, can jeopardize the trust's purpose.
Finally, allowing your estate plan to become stale is a common mistake. Estate laws and personal circumstances change over time, so it’s essential to review and update your trust documents regularly to confirm they remain effective and aligned with your current goals.
Trusts are a flexible, powerful tool in the estate planner’s toolkit, especially in a state like Maryland, where both estate and inheritance taxes can significantly impact how much your heirs receive.
By strategically using irrevocable trusts, credit shelter trusts, ILITs, and other planning techniques, individuals and families can significantly reduce or eliminate Maryland estate taxes while making sure that their assets are protected and distributed according to their wishes.
Contact Our Firm Today
Whether your goal is tax minimization, asset protection, or providing for future generations, working with an experienced Maryland estate planning attorney is essential. Sanders & Sanders, Attorneys at Law serves clients in Clinton, Bowie, Fort Washington, Largo, and the Washington D.C. area. Contact us for a consultation on your trusts today.