Five Essential Trusts and the Tax Traps You Didn’t See Coming

Why Timing and Structure Matter — Especially in Pennsylvania

You can use trusts to cement your legacy, organize your estate and limit your exposure to estate and gift taxes.

When most people think of estate planning, they focus on avoiding probate or ensuring their children “get everything.” But a more strategic approach asks: How can I protect my family, minimize taxes, and preserve control long after I’m gone?Trusts are often the answer — but which one, and when?

Let’s explore five essential trusts, when to use them, and the lesser-known tax and drafting issues — especially relevant for Pennsylvania residents, where inheritance tax rules differ from federal law.

Trust #1: Qualified Terminable Interest Property (QTIP) Trust

Best for: Blended Families

A QTIP trust allows you to care for your surviving spouse while ultimately preserving assets for your children from a prior marriage. It qualifies for the marital deduction, deferring federal estate tax until your spouse’s death. Upon that event, the remaining trust corpus passes to remainder beneficiaries — typically your children — and becomes taxable in your spouse’s estate.

Hidden Issue:

In Pennsylvania, although QTIP assets qualify for deferral of federal estate tax, PA inheritance tax applies at the spouse’s death, even to assets the spouse never controlled. Many families are unprepared for this sudden tax bill.

Sample Language:

“The Trustee shall pay all income to my spouse, [Name], for life, and upon her death, the remaining principal shall be distributed in equal shares to my children, per stirpes. This trust is intended to qualify as a QTIP trust under IRC §2056(b)(7), and the Executor is directed to make the necessary QTIP election.”

Trust #2: Special Needs Trust (SNT)

Best for: Heirs with Disabilities

An inheritance can unintentionally disqualify a disabled beneficiary from SSI or Medicaid. A properly drafted third-party SNT can hold assets for their benefit without interfering with public benefits eligibility.

Hidden Issue:

If the trust is improperly drafted — or the trustee disburses funds directly to the beneficiary — benefits may be lost. In Pennsylvania, post-mortem inheritance tax still applies to assets transferred into the SNT unless structured carefully.

Sample Language:

“No distributions shall be made directly to the beneficiary. The Trustee shall pay providers directly for goods and services benefiting [Name], including medical care, education, transportation, and adaptive equipment.”

Trust #3: Spendthrift Trust

Best for: Financially Irresponsible Beneficiaries

A spendthrift trust protects assets from the beneficiary’s creditors and poor decisions. The trustee retains full control over distributions, often based on milestones or needs.

Hidden Issue:

If the trust allows excessive discretion or direct access to income, it may lose its spendthrift protection under Pennsylvania law. Drafting must clearly exclude beneficiary access to principal or mandatory income rights.

Sample Language:

“This trust shall be deemed a spendthrift trust under Pennsylvania law. No interest of any beneficiary shall be assignable or subject to the claims of creditors. Distributions are solely at the discretion of the Trustee.”

Trust #4: Irrevocable Life Insurance Trust (ILIT)

Best for: Reducing Estate Tax Exposure

Although life insurance is not income taxable to beneficiaries, it is included in your estate if you retain incidents of ownership. An ILIT keeps the death benefit outside your taxable estate, preserving wealth for heirs.

Hidden Issue:

If you die within three years of transferring a policy to the ILIT, it may still be included in your estate under IRC §2035. And in Pennsylvania, if the death benefit is paid to the estate rather than named beneficiaries, it is subject to inheritance tax.

Sample Language:

“The Trustee is directed to apply all trust assets, including life insurance proceeds, solely for the benefit of the beneficiaries designated herein, and shall not distribute any funds to or for the benefit of the grantor or the grantor’s estate.”

Trust #5: Charitable Trusts (CLT & CRT)

Best for: Charitable Giving with Tax Efficiency

These trusts split benefits between a charity and your heirs.

• CLTs provide an upfront charitable gift (income to charity, remainder to heirs).
• CRTs provide lifetime income to you or another beneficiary, with the remainder to charity.

Both offer tax deductions — either up front (for CLTs) or spread over time (for CRTs) — and can help reduce estate and capital gains taxes.

Hidden Issue:

Many overlook the Pennsylvania inheritance tax when the remainder passes to heirs, particularly if the CRT is underfunded or improperly appraised. You must also follow strict IRS rules to preserve tax-exempt status.

Sample Language:

“The Trustee shall pay to [Charity] an annuity equal to 5% of the initial fair market value of the trust annually for a term of 20 years. Upon termination, the remaining principal shall be distributed to [Heirs] per stirpes.”

Bonus Insight: The Pennsylvania Inheritance Tax Trap

Unlike the federal government, Pennsylvania imposes an inheritance taxon nearly all asset transfers at death, including certain trust distributions, based on the recipient:

• 0%: Spouse or charity
• 4.5%: Lineal heirs (children, grandchildren)
• 12%: Siblings
• 15%: Others (including friends or unrelated individuals)

Assets titled in revocable trusts are subject to PA inheritance tax, just like those in your personal name. Irrevocable trusts may avoid tax if funded properly and more than one year before death.

Final Thoughts: Why Trusts Are Worth the Investment

Yes, trusts require planning, legal fees, and careful administration. But they offer enormous value:

• Avoid probate
• Protect heirs from creditors and themselves
• Control distribution timing
• Reduce (or defer) estate and gift taxes
• Preserve eligibility for public benefits
• Enable charitable giving on your terms

The key is not just what trust you choose — but how and whenit’s created. If you live in Pennsylvania or own property here, the state inheritance tax must be factored into every trust strategy.

Need help deciding which trust structure best suits your family, your goals, and your tax reality? Contact RJ Fichera Law Firm has helped hundreds of clients throughout Pennsylvania and beyond design estate plans that work. Let’s build yours with intention, clarity, and confidence.

This article was published by Kiplinger magazine,, and brought to you by the RJ Fichera Law Firm , with personal comments by RJ Fichera throughout the article. Our mission is to provide trusted, professional legal services and strategic advice to assist our clients in their personal and business matters. Our firm is committed to delivering efficient and cost-effective legal services focusing on communication, responsiveness, and attention to detail. For more information about our services, contact us today!

Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual.

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