How to Use Trusts to Reduce Taxes in South Carolina
If you own property, a business, or investments in the Charleston area, you might be paying more taxes than you need to. Many families in South Carolina don't realize that certain types of trusts can legally reduce or even eliminate taxes on assets you pass to your children.
In this post, we'll explain how trusts work to lower your tax bill and protect more of your wealth for the people you love.
What Is a Step-Up in Basis and Why Does It Matter?
The step-up in basis is one of the most powerful tax benefits in estate planning. Here's how it works.
When you die, the IRS resets the value of your assets to what they're worth on that date. This is called a "step-up in basis." If you bought a rental property in Mount Pleasant for $200,000 and it's worth $800,000 when you pass away, your children inherit it at the $800,000 value.
That means if they sell it right away, they pay zero capital gains tax. Without proper planning, they would owe tax on $600,000 of profit—about $120,000 in taxes.
In South Carolina, this matters even more because we don't have a state estate tax. That means you can take full advantage of federal tax rules without worrying about additional state-level taxes eating into your estate.
But here's the catch: this only works if your estate plan is set up correctly. We've seen Charleston families lose hundreds of thousands of dollars because they used the wrong type of trust or had no trust at all.
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How a Revocable Living Trust Protects the Step-Up in Basis
A revocable living trust is the most common tool we use to protect the step-up in basis for South Carolina families.
Here's what it does:
Avoids probate so your family doesn't wait months in Charleston County Probate Court
Keeps your estate private instead of becoming public record
Preserves the step-up in basis so your heirs pay less tax
Let's say you own three commercial buildings in the Lowcountry. You bought them years ago for $500,000 total. Today they're worth $3 million. If you die without a trust, your children will go through probate. If they want to sell the buildings, they'll owe capital gains tax on $2.5 million of appreciation. That's over $500,000 in taxes.
With a revocable living trust, your children inherit those buildings with a stepped-up basis of $3 million. They can sell them and pay zero capital gains tax.
The trust costs a few thousand dollars to set up. It can save your family half a million dollars or more.
When Should You Use an Irrevocable Trust Instead?
Revocable trusts are great for most families. But if your estate is large enough to owe federal estate taxes, you need a different strategy.
Right now, the federal estate tax exemption is about $13.99 million per person. For married couples in South Carolina, that's close to $28 million combined. If your estate is under that amount, you won't owe federal estate taxes.
But if you own a successful business, multiple properties, or significant investments, you could be over the limit. The estate tax rate is 40% on everything above the exemption.
An irrevocable trust removes assets from your taxable estate. You're essentially saying, "I don't own this anymore, so don't tax me on it when I die."
Here are three types of irrevocable trusts we use most often for Charleston business owners:
GRAT (Grantor Retained Annuity Trust)
You transfer an asset into the trust. The trust pays you back over a set number of years. Any growth above the IRS's assumed rate goes to your heirs tax-free. This works well for transferring business interests or stock.
IDIT (Intentionally Defective Grantor Trust)
This trust is "defective" for income tax purposes, which is actually a good thing. You pay the income taxes on behalf of the trust. This lets the trust grow faster because it's not losing money to taxes every year. It's like making a tax-free gift to your children.
SLAT (Spousal Lifetime Access Trust)
You create an irrevocable trust for your spouse. The assets are out of your estate, but your spouse can still access them if needed. This works well for blended families or couples who want protection without completely losing control.
Watch the full video for more information on how these advanced trust strategies work:
How to Offset Taxes With a Trust
Charleston estate planning attorney JP Rankin shares how to use a trust to reduce taxes in South Carolina.
How Charitable Trusts Let You Avoid Capital Gains Tax
If you're charitably minded, a charitable remainder trust (CRT) can save you a fortune in taxes.
Here's an example: You own land in the Lowcountry that you bought for $100,000. It's now worth $1 million. You want to sell it, but you don't want to pay $180,000 in capital gains taxes.
With a CRT, you transfer the property into the trust. The trust sells the property and pays zero capital gains tax because it's a charity. The trust invests the proceeds and pays you an income stream for the rest of your life. When you die, whatever's left goes to the charity of your choice.
You get three benefits:
No capital gains tax on the sale
An immediate charitable deduction when you fund the trust
Income from the full $1 million, not just the after-tax amount
In South Carolina, where many families have appreciated real estate or farmland, this strategy can save hundreds of thousands of dollars.
Why Life Insurance Needs Its Own Trust
Most people think life insurance is tax-free. The death benefit doesn't get taxed as income—that part is true.
But if you own the policy, the death benefit is included in your taxable estate.
Let's say you have a $5 million life insurance policy and your estate is worth $10 million. Your taxable estate is actually $15 million. If you're over the exemption limit, that $5 million policy just created a $2 million estate tax bill.
The fix is an ILIT—an irrevocable life insurance trust. The trust owns the policy, not you. The death benefit isn't part of your estate. Your heirs get the full $5 million tax-free.
For Charleston business owners with large life insurance policies, this is one of the simplest ways to save millions in estate taxes.
Want to learn more? Download our free guide "6 Mistakes Families Make When Choosing an Estate Planning Attorney" at https://www.rankinestatelaw.com/free-download-guide-6-mistakes-families-make
How Valuation Discounts Help You Transfer More Wealth
If you own a business or investment property, you can often transfer it at a discounted value for tax purposes.
Here's why: If you own 40% of a business but don't have control, the IRS allows you to apply a "minority interest discount" and a "lack of marketability discount."
Instead of valuing your 40% stake at $4 million, you might value it at $3 million—a 25% discount. That means you can transfer $4 million of value while only using $3 million of your gift tax exemption.
This works especially well with family limited partnerships and LLCs. You can transfer business interests or real estate to your children at a discount, which lets you move more wealth out of your estate without triggering gift taxes.
In South Carolina, where many families own rental properties, farmland, or small businesses, this strategy can make a huge difference.
Frequently Asked Questions
Does South Carolina have an estate tax or inheritance tax?
No. South Carolina does not have a state estate tax or inheritance tax. You only need to worry about federal estate taxes if your estate is over $13.99 million (or about $28 million for married couples). This makes South Carolina a great state for estate planning because you can focus on federal tax strategies without additional state-level complications.
How much does it cost to set up a trust in Charleston?
A revocable living trust typically costs between $3,000 and $6,000 depending on the complexity of your estate. Advanced irrevocable trusts can cost more, but they often save families hundreds of thousands or even millions in taxes. The cost of setting up a trust is almost always less than the cost of probate or estate taxes without one.
Can I change a revocable trust after I create it?
Yes. A revocable living trust can be changed or canceled at any time while you're alive and mentally competent. You can add or remove assets, change beneficiaries, or even dissolve the trust completely. That's what makes it "revocable." An irrevocable trust, on the other hand, generally cannot be changed once it's created.
What happens if I die without a trust in South Carolina?
Your estate will go through probate in the county where you lived—such as Charleston County or Berkeley County. Probate can take six months to a year or longer. Your assets become public record. Your family may face delays, court costs, and attorney fees. If you own property in multiple states, your family may have to go through probate in each state.
Do I need a trust if my estate is under the federal exemption?
Yes, in most cases. Even if you won't owe estate taxes, a trust helps you avoid probate, keep your estate private, and protect the step-up in basis for your heirs. It also protects your assets from creditors, lawsuits, and divorces. For most families in the Charleston area, a revocable living trust is the foundation of a solid estate plan.
How does a trust protect my children's inheritance from divorce?
When you leave assets to your children in a properly structured trust, those assets are owned by the trust—not by your child personally. If your child gets divorced, the inheritance stays in the trust and is protected from division in the divorce. This is especially important in South Carolina, where marital property is divided equitably (fairly) in a divorce, which could include inherited assets if they've been commingled with marital property.
Protect Your Family's Wealth with the Right Trust Strategy
You've worked hard to build your wealth. You didn't do it so the IRS could take half when you die.
Good tax planning isn't about cutting corners. It's about using the tools the law gives you to protect what's yours. At Rankin Law Firm, we help families in Charleston, Mount Pleasant, and throughout the Lowcountry build estate plans that actually work—plans that save taxes, avoid probate, and protect your wealth for the next generation.
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About JP Rankin
JP Rankin is the founder of Rankin Law Firm in Charleston, South Carolina, and is licensed in South Carolina, North Carolina, and California. He has helped hundreds of families avoid probate, minimize taxes, and protect their legacies with customized estate plans built around each family’s unique needs.
Disclaimer
This article and video are for informational purposes only and do not constitute legal advice. Viewing or interacting with this content does not create an attorney-client relationship.