Living trust may be an estate tax trap. These trusts are often used to avoid assets from going through probate. However, trust assets can be taxed and the IRS has three years to audit an estate return. The trustee for the deceased can be held personally liable for tax liabilities owed if an IRS audit is completed after the trust distributes its assets. Should the beneficiaries not return assets then the trustee might have to pay the tax from their own funds.