Hyden, Miron & Foster, PLLC Law Blog

Monday, January 25, 2021

How Are Revocable Trusts Taxed?

Have you considered including a revocable trust as part of your estate plan? Revocable trusts offer many benefits, one of which that it allows the assets held in the trust to avoid probate upon the death of the trust grantor. This is a popular reason why revocable trusts are established as probate can be notoriously costly and time-consuming. This is not to mention the fact that the court-supervised estate administration, which is probate, often leads to a significant delay in the transference of assets to beneficiaries that are likely anxious to receive them.

While setting up a revocable trust may be beneficial to you and your loved ones in many ways, it is important to understand some of the key implications of establishing legal tools such as trusts. For instance, one significant aspect that often goes undiscussed is how revocable trusts are taxed. We will discuss this in greater detail here.

How are Revocable Trusts Taxed?

If you establish a revocable trust, how will this impact your taxes? Will you need to change your income tax reporting? Are you going to have to prepare a separate income tax return for the revocable trust? Who will be responsible for paying income taxes on the income generated by trust assets? These are all really great questions to ask and to find out the answers to. In order to not only answer these questions but to understand the answers, it can be helpful to talk more about how revocable trusts operate.

When a revocable trust is created, you will sign the trust document as the “grantor” of the trust. With a revocable trust, the grantor retains a significant amount of control of the trust. It offers a great deal of flexibility as the grantor can amend and change the terms or the trust and, of course, has the ability to revoke the trust at any time, which is why it is referred to as a “revocable” trust. Additionally, after transferring personal assets into the trust, the grantor retains the right to receive income generated by the trust as well as accessing the principal.

Due to the fact that the grantor retains so much control over the revocable trust, it may come as no surprise that Internal Revenue Service (IRS) rules require grantors of a revocable trust to be taxed on the income earned by the trust assets. The grantor’s Social Security number (SSN) is used to establish the trust’s bank accounts and for investment purposes.

Being the grantor of a revocable trust means that, for tax purposes, the IRS sees right through the trust. It is as if the trust really is not even there. The grantor will report all trust income on his or her personal tax return so long as he or she lives. There will be no need to file a separate tax return for the trust. It is important to note, however, that even though the IRS essentially considers trust assets assigned personally to the grantor, trust assets still avoid probate administration upon the grantor’s death.

Estate Planning Attorneys

There are important tax implications associated with estate planning and the use of various estate planning tools, such as revocable trusts. For a team of estate planning attorneys that will design a comprehensive estate plan for you that maximizes tax benefits, Hyden, Miron & Foster is here for you. Contact us today.


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