Gross estates have an undeserved reputation for being a bad thing – at least if they're worth a great deal so they might incur an estate tax. Your estate doesn't pay tax on its gross value at the time of your death, however. Its gross value is just the starting point for figuring out whether estate taxes will come due. Unfortunately, forming a revocable trust doesn't do anything toward reducing the size of your estate.
A revocable trust is a living trust – you create it while you're alive and, in most cases, you serve as trustee. You can name someone else to act as trustee, but that would complicate the trust's main advantage: personally managing the assets you've funded it with. When you act as trustee, you don't need anyone else's cooperation to move assets in or out of the trust, to change its beneficiaries, or to revoke and close it entirely. Revocable trusts are mostly a vehicle for avoiding probate. They hold on to your property for you until your death, then your assets transfer directly to your beneficiaries. Because the trust is revocable, the Internal Revenue Service still considers its assets to be your property.
Your gross estate is pretty much everything you own when you die. Because you maintain what the IRS calls "incidents of ownership" over the assets in your revocable trust -- meaning that you controlled the assets up until the time of your death -- they're included. A few other surprising assets can contribute to your gross estate as well. For example, life insurance that pays out to your family member when you die is part of your gross estate if you or your trust owns the policy – not its value during your lifetime, but the death benefits when you die. You'll never see this money, but it's still included in your gross estate for tax purposes.
Your taxable estate is what your estate must actually pay taxes on. This number is arrived at by subtracting all allowable deductions from your gross estate, and there are quite a few. For example, if you're married, all assets that your revocable trust transfers to your spouse are deductible. If you place all assets in your trust and their aggregate value is $2 million, and if you leave half to your spouse and direct your trust to give the other half to your children, your taxable estate drops to $1 million. Your estate can also deduct all debts you owe when you die, including sizable ones like your mortgage. It can deduct the costs of your funeral or burial. Even though you can't subtract the value of the assets you placed in the trust, taking these other deductions can help pare down the value of your estate.
Federal Estate Tax
The good news is that you probably won't have to worry about your gross estate, your taxable estate, or estate taxes unless you're pretty wealthy when you die. As of 2013, the federal estate tax exemption is $5.25 million, and it will increase yearly to keep pace with inflation. Therefore, your taxable estate would have to exceed this amount before any taxes would be due. So go ahead and place your assets in a revocable trust. You'll shield them from the prying eyes of others because your estate won't have to pass through probate – the probate process is a matter of public record. You'll maintain control over them and they'll pass more efficiently to your beneficiaries when you die. They just won't escape estate taxation if your estate is very large.