Spiro J. Verras Blog

Tuesday, December 22, 2020

How Are Revocable Trusts Taxed?

A trust can be a valuable estate planning tool for a number of reasons. For instance, a trust can provide a safe place for valuable assets to be held for an extended period of time with the intent to eventually leave them to a loved one. With this, a person can protect assets while helping ensure that the assets are eventually distributed as wanted. This can help a great deal with streamlining asset distribution after a person passes away. Trusts can also help reduce significant tax consequences, such as estate tax implications.

How Are Revocable Trusts Taxed?

While revocable trusts can help with estate taxes, it is important to have a full picture of the tax consequences of a revocable trust. Revocable trusts and irrevocable trusts have their own tax requirements. In the case of a grantor of a revocable trust, however, he or she maintains ownership rights and control over the property held in trust. Because of this, the grantor will remain responsible for paying taxes on the income generated by the trust until he or she passes away.

A revocable trust gives the grantor the flexibility to change the terms of the trust at will to conform with certain needs and plans. The trust can also be canceled outright by the grantor after being established. A grantor can either act as trustee until death or appoint a trustee who will manage the trust per the grantor’s instructions. Over the course of a revocable trust’s lifetime, the principal held within the trust is likely to fluctuate with appreciation or depreciation of the assets held within. The principal amount itself can also change as the grantor retains the ability to both withdraw and contribute assets to the trust over their lifetime.

Due to the fact that the grantor retain such extensive control and flexibility with regards to the revocable trust, it becomes clearer as to why the tax burden of the trust will fall on the grantor’s shoulders. Any income generated by trust assets must be reported on the income tax filing of the grantor. Trust beneficiaries will have no responsibility regarding tax obligations associated with the trust because the grantor will have already paid these taxes.

When the grantor of the revocable trust passes away, the trust becomes irrevocable. When the trust becomes irrevocable, the tax consequences will shift significantly. Trust grantors, as well as trust beneficiaries, should, therefore, ask about the potential tax consequences associated with the trust changing from revocable to irrevocable and plan accordingly.

Estate Planning Attorney

Tax consequences are significant, yet often neglected, area of estate planning. In order to establish a comprehensive, strong estate plan that meets the needs of you and your loved ones and accomplishes the goals you intend to accomplish, tax consequences need to be part of the conversation. At Verras Law, we take a comprehensive approach to estate plan where we account for the things that can impact your wishes, such as tax consequences. More questions? We have answers. Contact Verras Law today.

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