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Do Revocable Trusts Help You Save Money on Taxes?


In many ways, a revocable trust is the best of both worlds.  The revocable trust is a non-probate asset, much like an irrevocable trust.  Unlike an irrevocable trust, though, a revocable trust does not require you to make a forever decision about your money and then live to regret it.  The thing that makes a revocable trust revocable is that, for as long as you live, you can amend the trust instrument of the revocable trust as many times as you choose.  Estate planners can cite many examples of how keeping assets out of probate can save money for you and your heirs, but revocable trusts are not a tax avoidance scheme so ingenious that the IRS has yet to find a way to make you pay taxes on them.  In fact, you do pay taxes on your revocable trust, and eventually, so do your heirs.  If you are planning to establish a revocable trust and need help with estate planning, contact a Washington, D.C. estate planning lawyer.

While You Are Alive, Your Revocable Trust Is Still Testing the Waters

The purpose of a trust is to transfer ownership of your assets to a legal entity that is separate from you.  Irrevocable trusts have their own taxpayer ID numbers; they file their own tax returns and pay taxes according to the tax laws specific to trusts.  A revocable trust is not a completely separate legal entity.  You, the grantor of the trust, still have the right to make changes to the trust instrument, so by this logic, the trust does not function completely independently of your input, in contrast to an irrevocable trust.

For tax purposes, a revocable trust is not a separate entity from the grantor during the grantor’s lifetime.  You pay taxes on the assets in your revocable trust just as you would if the trust did not exist.  It is similar to how, if you establish a sole proprietorship, its income counts as your personal income for tax purposes.

Your Revocable Trust Comes of Age After You Die

A revocable trust is only revocable as long as the grantor is alive.  When the grantor dies, the trust becomes irrevocable and the successor trustee applies for a taxpayer ID number for it.  The assets that are in the trust at the time of the grantor’s death, known as the principal of the trust, are not taxable, because the grantor already paid taxes on them when he or she was alive.  If the trust assets generate additional income after the grantor’s death, this income is subject to taxation.  The trust itself does not pay taxes on its income; rather, the beneficiaries pay taxes on the distributions they receive from the trust’s income, just as they would if they were getting income from employment or investments.

Contact Tobin O’Connor Ewing About Revocable Trusts

A Washington, D.C. estate planning attorney can answer your questions about revocable and irrevocable trusts and the taxes associated with them.  Contact Tobin, O’Connor, and Ewing in Washington, D.C. or call 202-362-5900.



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