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:
- A revocable living trust typically uses your own social security number as its tax identification number while you are alive.
- 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.
- During your lifetime, your revocable trust does not file its own separate tax return.
- After you die, the trust becomes irrevocable. At that time, it will have its own tax identification number.
- 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.
- 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.
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