Six Tips on How Revocable Living Trusts Are Taxed

One fear that holds some people back from using a living trust as part of an estate plan pertains to taxes. For those who have never before used a revocable trust, it may be assumed that the trust will have to pay taxes and file returns. In many cases, however, this is a common misconception. A revocable living trust is for many purposes simply ignored by the Internal Revenue Service while you are still alive. This is because a revocable trust leaves the creator of the trust with full control over the assets.

How Revocable Trusts Are Taxed

If you opt to create a trust while preparing an estate plan, the following is a general overview of how this trust is taxed:

  1. A revocable living trust typically uses your own social security number as its tax identification number while you are alive.
  2. During your lifetime, income, deductions, and credits from your assets held in trust are reported on your personal tax return under your social security number.
  3. During your lifetime, your revocable trust does not file its own separate tax return.
  4. After you die, the trust becomes irrevocable. At that time, it will have its own tax identification number.
  5. After your death, income from the assets held in trust will be reported on the trust’s income tax return. The income is reported to that tax identification number with a Form 1099.
  6. After your death, a trust reports its income on a Form 1041.

The rules surrounding the taxation of living trusts become somewhat more complicated after you pass. In general, however, the above rules provide a helpful guideline as to the income taxation of revocable trusts.

Was this information helpful to your understanding of how real estate is sold during a probate administration? If so, we encourage you to share it with your friends and family on Facebook.

James F. Roberts
Founder and owner of the Law Office of James F. Roberts and Associates, a premiere estate planning law firm
Be the first to comment!
Post a Comment