Revocable Trusts and Your Taxes
Establishing a trust is a big commitment. Depending upon your age and what you hope to accomplish by the trust, a revocable trust may be the right choice for you. A revocable trust is just what you need if you are afraid of commitment. You can modify the trust instrument and change the trustees and beneficiaries as many times as you choose throughout your lifetime. Because a revocable trust is so closely under your control, the IRS does not consider it a separate entity. Therefore, a revocable trust does not get its own taxpayer ID number or file its own tax returns. Instead, you continue to include the trust assets on your personal income taxes and pay taxes on them just like you would do if the trust did not exist. In other words, while you are alive, a revocable trust has as little effect on your personal taxes as a sole proprietorship would have.
The Afterlife of a Revocable Trust
A revocable trust undergoes a transformation upon the death of the grantor. Specifically, it becomes an irrevocable trust, since the grantor is no longer around to tinker with its trust instrument. Therefore, the successor trustee must apply for a taxpayer ID for it and file tax returns on its behalf. Despite this, the principal in the trust is not taxable, since the grantor already paid taxes on it while he or she was alive. Any income that the trust earns is taxable, however. The successor beneficiaries pay taxes on the distributions they receive from the income generated by the trust. From their perspective, the trust income is a lot like income they would get from employment or investments.
Contact a Florida Elder Law Attorney About Planning to Establish a Revocable Trust
An estate planning attorney can help you understand the tax implications of setting up a revocable trust, for you and for the successor beneficiaries. Contact The Law Office of Laurie R. Chane in Dade City, Florida to discuss your estate plan.
Source:
specialneedsalliance.org/the-voice/a-short-primer-on-trusts-and-trust-taxation-2/
