1. Revocable Living Trust Taxes

Revocable Living Trust Taxes

Author: Real Estate Holding Company

Published Jul 12th, 2023Updated Feb 14th, 2024
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Revocable Living trusts sounds like a simple process with big benefits.

You create a living trust while you’re alive and you can alter the terms at any given time. You distribute assets to yourself while you’re of sound mind, and when you pass away a successor trustee takes over and distributes your assets according to your wishes.

Those are the absolute very basics of a revocable living trust.

As simple as it all sounds, it’s actually a very thorough process that contains a lot of detail. For example, did you know that you have to pay taxes on a living trust? And do you know how a revocable trust is taxed after death?

Keep reading as we answer these questions and more.

What is a Revocable Living Trust?

The revocable living trust has been a significant estate-planning tool for many years and is the foundation for most estate plans. It provides privacy, while avoiding probate and family in-fighting. It ensures the right money gets into the right hands at the right time.

As the trustmaker of the revocable living trust, you are also the trustee. This means that you are the person who controls the assets in the trust and handles the administration – such as tracking income and tax returns.

Advantages of a Revocable Living Trust

While a living trust does not provide asset protection, like an irrevocable trust, it is flexible and is the basis of many family estate plans. Compared to other legal documents, such as wills, revocable living trusts provide benefits such as increased privacy and more flexibility.

What are the benefits of putting your assets into a revocable living trust? Here are the top five:

Avoid Probate – One of the biggest advantages of revocable living trusts is the avoidance of probate. Assets held in a trust avoid probate because the trust itself doesn’t diminish with the trustmaker.

Flexibility – Many individuals find that flexibility to alter their living trust as they see fit is best suited for their situation.

Privacy – Living trusts are never filed with a court, therefore they do not become public record. As mentioned above, living trusts also help avoid probate, which keeps your records our of public proceedings.

Continuous Management – By naming a professional trustee to manage your property, the wealth that you’ve accumulated can continue to grow for multiple generations and you can put restrictions on the income or withdraws.

Avoid Guardianship or Conservatorship – If you were to become disabled or incapacitated, your assets would be subject to the restrictive rules of guardianship or conservatorship. A revocable living trust allows you to name a successor trustee so that someone can manage your trust and assets for you if you can no longer do it yourself.

Revocable Living Trust Taxes

From an income tax standpoint, revocable living trusts are the simplest of all trust arrangements. Because the trustor (the creator) has full control over the terms of the trusts and assets, any income generated by a revocable trust is taxable to the trustor during their lifetime.

All items of income, deduction, and credit will be reported on the trustor’s personal income tax return, and no return will be filed for the trust itself. Revocable trusts are considered “grantor” trusts for income tax purposes. Which means they are practically invisible to the IRS and state taxing authorities.

Here’s a brief overview of taxes during a Grantor’s life and after:

Taxes during Grantor's life

As the person who controls the revocable living trust, and who can move assets in and out as they wish, the Grantor (you) is responsible for taxes of the trust. The trust is not filed under a separate tax return, therefore you are solely responsible for ensuring all taxes are taken care of while you’re in control of the trust.

Taxes after Grantor’s Death

Upon your death, the trust moves to the trustee. The trustee must file a final tax return upon your behalf and declare all earned income from the trust. However, this will be filed on a separate tax return. Speaking with an experienced estate planning attorney can help explain the ins-and-outs of taxes once a trust is in the hands of a trustee.

Revocable living trusts offer no tax benefits. Shifting assets into a revocable trust won’t save income or estate taxes. You will need to work with an attorney to implement appropriate tax-reduction strategies.

Should You Set Up a Revocable Living Trust?

When working with an estate planning attorney, you’ll pay $2,000 or more for a revocable living trust.

This often raises the question, do the benefits of a living trust outweigh the costs. The answer is that it depends solely on your unique situation, goals, and assets.

Anyone with assets that are titled solely to themselves that wants to leave those assets to family or friends if they become incapacitated or pass away, should consider a revocable living trust. Not all living trusts are created equal, so these documents can benefit single individuals, married couples, or people with minor children.

Individuals often consider revocable living trusts because the advantages and benefits do outweigh the costs and disadvantages. Avoiding thousands of dollars in probate, maintaining privacy, and having the ability to control assets is all some people want and need.

Whether a revocable living trust is the right choice for you and your beneficiaries depends greatly on your specific needs and circumstances. The decision to create one requires a thorough legal analysis of several factors as they affect each individual and family. Consult with an experienced attorney to help you navigate the process.

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