Revocable Trusts And Your Taxes
Financial planners and estate planning lawyers sometimes talk about revocable trusts as though they are a solution to everyone’s every problem. By this logic, a revocable trust enables you to sprout a doppelganger that owns your money and then pays it back to you, and, naturally, this is something that everyone wants. They might even tell you that a revocable trust can solve every problem from Medicaid eligibility to conflicts between stepmothers and stepchildren during probate. All exaggeration aside, the beauty of revocable trusts is their flexibility. You get to try out ways to manage your money, and if it isn’t working, you can make changes. As the settlor of a revocable trust, you can modify the trust instrument an unlimited number of times during your lifetime. You can be the trustee, the beneficiary of the trust, both, or neither. While a revocable trust is a non-probate asset, it is not a tax shelter, whether during your lifetime or after you die. A Tampa estate planning lawyer can help you make the best decisions about your revocable trust, while taking into account the associated tax obligations.
As Commitment Goes, a Revocable Trust Is Only an Engagement Ring
Irrevocable trusts are their own legal entities, with their own taxpayer ID numbers and their own set of tax-related guidelines to follow. The IRS does not consider a revocable trust a full-fledged trust, in much the same way that you can’t get court-ordered alimony if you break up with your fiancé, even if you lived together and had children together. While you are alive, the IRS counts your revocable trust as part of you, not as a separate entity. Therefore, you pay the same taxes on the assets you have transferred to the revocable trust as you would pay on them if the trust did not exist. A revocable trust is a trust that isn’t not you in much the same way that a sole proprietorship is a company that isn’t not you.
What Happens to Your Revocable Trust After You Die?
Once you are no longer alive to revoke your revocable trust, it becomes an irrevocable trust and gets its own tax ID number. Meanwhile your property that is not in the trust goes to probate, where the personal representative of your estate files a tax return for it. The principal of your trust is not taxable, because you already paid taxes on it during your lifetime, so when the successor beneficiaries receive it, they will not pay taxes on it, either. If the trust earns income, its income is taxable, and the beneficiaries are responsible for paying those taxes, just like they would for income they received through employment or investments.
Contact David Toback About Estate Planning for Commitment Phobes
A Central Florida estate planning lawyer can help you modify your revocable trust and then modify it again, as many times as necessary. Contact David Toback in Tampa, Florida to set up a consultation.
Source:
specialneedsalliance.org/the-voice/a-short-primer-on-trusts-and-trust-taxation-2/
