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Wednesday, January 27, 2021

How Are Revocable Trusts Taxed?

During the estate planning process, the benefits, as well as the importance of various legal tools, are discussed. The potential advantages of having different types of trust arrangements is also evaluated. Revocable trusts, for example, are often included in estate plans as a means of avoiding the probate process for the assets held within the trust. A notoriously lengthy and often expensive process, probate is often tried to avoid by a variety of means, a revocable trust being one of them. With a revocable trust, trust beneficiaries also avoid the delay of accessing the trust assets left to them as they would have had to experience had the assets needed to go through the probate process instead. While it is important to discuss what can be accomplished by estate planning tools such as a revocable trust, there are other assets of this trust arrangement that must be accounted for. For instance, how revocable trusts are taxed is an important subject, but one that is all too often neglected.

How are Revocable Trusts Taxed?

A revocable trust is one that the creator can amend or revoke at any time without needing the consent of anyone else, even the trust beneficiaries. The flexibility of a revocable trust makes it an attractive estate planning tool as, despite the creator’s ability to control the trust, the trust assets remain removed from the probate estate. The creator of the trust retains unrestrained control of trust assets as long as he or she retains legal capacity or is, in other words, legally competent. Upon the death of the trust creator, the trust assets are distributed according to the terms set forth in the trust document.

Due to the fact that revocable trusts allow the creator of the trust to retain such substantial control and allow them for such a significant amount of flexibility, the tax treatment of revocable trusts may come as no surprise. In fact, revocable trusts are among the simplest of trusts in terms of how they are treated for income tax purposes. To the IRS, a revocable trust is, essentially, not there. All income generated by assets held in a revocable trust is taxable to the creator of the trust during his or her lifetime. This is, of course, because of the fact that the creator of the trust retains control over the trust assets.

The IRS basically looks through the trust straight to the trust creator for income tax purposes. The trust creator’s Social Security number is used as the taxpayer identification number for the trust. Any income, deductions, and credits relating to the trust are reportable on the personal income tax return for the creator. No separate tax return is filed for the trust.

Elder Law Attorney

Trust arrangements are complex but can have significant benefits. At Monk Law we will evaluate all of your estate planning options to come up with a strong, comprehensive plan that best meets the needs of you and your family. Contact Monk Law today.


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