Revocable trusts do not have to pay federal income tax because the grantor pays taxes on the assets in the trust during their lifetime, and the beneficiaries pay income taxes on the income they receive from the trust’s income.
Revocable trusts are a popular way to keep your property out of probate, so that the assets in the trust can pass to your heirs as quickly and inexpensively as possible. Financial planners sometimes make it sound like a revocable trust is a magic wand that will make the IRS disappear, but unfortunately, it is not that simple. Revocable trusts do not have to pay federal income tax or file their own tax returns, but someone somewhere is responsible for those taxes. The specifics of tax obligations related to a revocable trust vary according to whether the grantor, the person who set up the trust, is still alive. A St. Petersburg trusts lawyer can help you understand how your revocable trust will affect your tax obligations and those of the beneficiaries.
A Revocable Trust is By, For, and About You
As the grantor of a revocable trust, you can change your mind as many times as you want about the trustee, who has the authority to make transactions on behalf of the trust, and the beneficiaries, to whom the trust instrument instructs the trustee to distribute money from the trust. Many Florida seniors are the grantor, trustee, and beneficiary of their own revocable trusts.
Although this is not the only option, the IRS assumes that you have set up the revocable trust for your own benefit, and it sets its taxation rules accordingly. While you are alive, the IRS taxes the assets in your trust as if they still belong to you, not to the trust; a revocable trust does not even need its own taxpayer ID number when the grantor is alive. It is a similar situation to paying taxes on a sole proprietorship, like a one-person nail salon that you operate out of a room in your house.
Revocable Trusts Come of Age When the Grantor Dies
When the grantor dies, everything about your revocable trust changes. First, it is no longer revocable now that you are no longer around to revoke it. The successor beneficiary, whom you listed in the trust instrument, must apply for a taxpayer ID for the trust and file its tax returns. The principal of a deceased person’s formerly revocable trust is not taxable, because the grantor already paid taxes on it during his or her lifetime. If the trust continues to earn income, the beneficiaries pay taxes on it, just like they would on employment income or investment income.
Contact Kruse Law About Revocable Trusts
A St. Petersburg estate planning lawyer can help you plan for the taxes that you and your heirs will, at different times, have to pay on your trust. Contact Kruse Lawin St. Petersburg, Florida to set up a consultation.