No, revocable trusts do not save income taxes, nor do they save estate taxes. In most cases, however, the property in a revocable trust is treated as if it were the grantor’s own property for both income tax and estate tax purposes.
Are revocable trusts included in gross estate?
Your gross estate is pretty much everything you own when you die. Because you maintain what the IRS calls “incidents of ownership” over the assets in your revocable trust — meaning that you controlled the assets up until the time of your death — they’re included.
Revocable trusts are the simplest of all trust arrangements from an income tax standpoint. Any income generated by a revocable trust is taxable to the trust’s creator (who is often also referred to as a settlor, trustor, or grantor) during the trust creator’s lifetime.
These assets are included in the gross estate. To form a trust, the grantor must transfer his ownership in the trust property to the trustee. However, since the decedent retains the ability to regain the assets in a revocable trust, the property he donated to the trust is included in his estate.
How is money distributed in a trust?
The trust can pay out a lump sum or percentage of the funds, make incremental payments throughout the years, or even make distributions based on the trustee’s assessments. Whatever the grantor decides, their distribution method must be included in the trust agreement drawn up when they first set up the trust.
When does a revocable trust become a living trust?
Revocable trusts are created during the grantor’s lifetime (the grantor being the original owner of the assets), making it a living trust.
Can a trust be distributed on a staggered basis?
You can have your trust make staggered distributions of trust assets, which means the beneficiaries receive them over time based on rules that you set. For example, the grantor may choose to distribute trust funds on a timed basis, like monthly, or only after certain triggering events, such as when the beneficiary turns 18 or gets married.
How does distribution of trust assets to beneficiaries work?
This type of trust distribution is straightforward, but it doesn’t come with any protections — a spendthrift beneficiary may squander their inheritance very quickly. You can have your trust make staggered distributions of trust assets, which means the beneficiaries receive them over time based on rules that you set.
What happens to trust funds after grantor dies?
Once all trust funds are distributed, the trust is typically dissolved. A revocable trust may be created to distribute assets after the grantor’s death (and close shortly after), while an irrevocable trust can continue to exist for years, even decades. The longer a trust is open, the more costly it becomes due to extended maintenance costs.
