How Do Taxes Work With A Revocable Trust?

A revocable trust seems like an ideal way to have your cake and eat it too.  The money in the trust doesn’t become part of your estate when you die, but while you are alive, you still get to have control over it.  Not only can you be the trustee or beneficiary of your own revocable trust, but you can also be both the trustee and the beneficiary.  It is an exquisite charade where you pay all the parts.  How could the IRS be fooled by something so obvious?  In fact, the IRS is not fooled.  Is there anything a revocable trust can’t do?  In fact, there is.  Revocable trusts make it much easier for your estate to settle, and they can also be a cost-effective and conflict-proof way to manage your long-term care, but they do not completely remove your tax obligations or those of any other beneficiaries.  To find out how to get the maximum benefit for yourself and your family from your revocable trust, contact an Orlando estate planning lawyer.

The Assets in Your Revocable Trust Are Safe From Creditors, but Not From the IRS

An irrevocable trust is a completely separate entity, like an institution or a business.  It has its own taxpayer ID number, and once you have created it, you cannot control it.  It does whatever your trust instrument has programmed it to do, even if you change your mind.  The only way to slay the monster is to revoke the trust.  For this reason, some people choose not to bring their irrevocable trusts to life until after the grantor dies.  With a testamentary trust, if you set up the trust document to make your trust cause trouble, at least you won’t be alive to regret it.

In light of this, a revocable trust is a preliminary trust.  You, as the grantor of the trust, can modify the trust instrument as many times as you want as long as you are alive.  Therefore, the IRS considers that the money in the trust still belongs to you.  A revocable trust does not get its own taxpayer ID number during your lifetime, and you pay taxes on the money in the trust in the same way as you pay taxes on any of your other income and assets.

When you die, the only person who has the authority to revoke the revocable trust is gone, so it becomes an irrevocable trust.  At this point, it gets its own taxpayer ID number.  The principal of the trust is not taxable, since you already paid taxes on it during your lifetime.  If the trust earns income, the beneficiaries of the trust must pay taxes on the trust income, just like they would pay on any other kind of income.

Contact Gierach and Gierach About Revocable Trusts

An estate planning lawyer can help you make wise decisions about your revocable trust.  Contact Gierach and Gierach, P.A. in Orlando, Florida to discuss your case.

Source:

specialneedsalliance.org/the-voice/a-short-primer-on-trusts-and-trust-taxation-2/