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Home > Blog > Estate Planning > Revocable Trusts Are Not a Tax Haven

Revocable Trusts Are Not a Tax Haven


Setting up an irrevocable trust is intimidating for almost everyone except for people who have grown up around them.  The word “irrevocable” is scary, even for people who do not think of themselves as commitment phobic.  Watching a trust manage your money while you are unable to change your mind about it feels too much like getting a visit from the Ghost of Christmas Yet to Come.  A revocable trust is just what the doctor ordered for commitment phobes who still want to keep their assets out of probate.  Setting up a revocable trust is a good idea, because it enables you to see how the provisions of your trust instrument work in practice, so that you can amend them if you decide to.  Financial planners often tout the tax-saving benefits of trusts, but revocable trusts are not a sleight of hand that makes you invisible to the IRS.  To find out more about revocable trusts and how they can be beneficial to your estate plan, contact a Bronx estate planning lawyer.

How Are Revocable Trusts Different From Other Kinds of Trusts?

A revocable trust does not stay revocable forever, only as long as the person who set up the trust, known as the settlor, is alive.  When people set up revocable trusts, they are probably thinking more about what they can do with the trust in the short term, as opposed to what will happen to the money in the trust after the settlor dies, but it is helpful to think about the big picture.  From the perspective of the IRS, a revocable trust is an irrevocable trust that has not become revocable yet.

While you are alive, the IRS can never be sure how much money will be in your trust from one year to the next, so it acts as if you have not committed to the trust yet.  Therefore, revocable trusts do not file their own tax returns.  Instead, you include the assets in the trust on your own personal income tax return, and you pay the same taxes on them as you would if the trust did not exist.  It is a similar scenario to how self-employed people can set up a sole proprietorship, but the sole proprietorship is not a separate entity for tax purposes.

After the settlor dies, the trust becomes irrevocable, and the successor trustee applies for a taxpayer ID number for it.  The principal of the trust, defined as the assets that were in the trust when the settlor died, is not taxable.  Income earned by the trust after the settlor’s death is taxable, however.  When successor beneficiaries of the trust receive distributions from the trust’s income, they must pay taxes on it.  In other words, no one completely avoids paying taxes on a revocable trust.

Schedule a Confidential Consultation With a Bronx Estate Planning Attorney

An estate planning lawyer can help you establish a revocable trust and take into account the associated tax obligations.  Contact Cavallo & Cavallo in the Bronx, New York to set up a consultation.



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