The Tax Implications of a Living Trust

There are various types of Living Trusts that can assist you in avoiding, reducing, or deferring federal inheritance and income taxes. For more details, speak with an expert.

There will be financial repercussions whether you use a Will or a Trust as your main succession preparation instrument. The following are some of the financial implications of a Living Trust:

Income Tax Implications

Irrevocable Trusts: When the grantor or the grantor’s partner is the trustee or co-trustee of the Living Trust, the grantee is still considered the proprietor of the assets that are now part of the trust. As a result, if you are the administrator of your Living Trust, you must record the revenue from the Living Trust assets on your personal income tax return in the same way that you did before moving the assets into your trust. If another entity serves as trustee, the donor is not obligated to pay income taxes on trust assets; instead, the trustee is subject to extra tax filing requirements.

Revocable Trusts: Regardless of who is the administrator, the creator of a Living Trust is regarded as the proprietor of the assets that are now part of the trust for income tax reasons.

Gift Tax Implications

When assets are moved into a permanent trust, the donor must pay gift taxes. Gift taxes do not apply to revocable trusts, but they are included in the grantor’s inheritance for estate tax reasons.

Estate Tax Implications

A Living Trust can include estate tax savings clauses, but it has no more estate tax savings potential than a conventional Will. The Living Trust avoids bankruptcy, which is the main expense saving distinction between the two.

If you are interested in establishing a Living Trust, consult an expert because there are several types of Living Trusts that can help you prevent, decrease, or postpone federal inheritance and income taxes.