A living revocable trust is a trust created during the lifetime of the grantor. Under this instrument, the grantor acts as the trustee during their lifetime and retains complete control over the corpus of the trust. While the grantor is alive and has the capacity, they have the authority to revoke the trust, change the terms of the trust, remove property from the trust, and add a property to the living revocable trust. Understanding the basics of living revocable trusts is imperative to ensuring your family’s financial future.
There are Typically No Tax Benefits to a Living Revocable Trust
When an individual creates a living revocable trust, they are simply transferring taxed assets into a financial structure. As such, the assets are subject to tax upon their death because they are part of their estate for federal estate tax purposes. Financial instruments like the unified estate tax credit, the unlimited marital deduction, and unlimited charitable deduction may be incorporated into the financial structure of a living trust. However, the total estate subject to the estate tax will not benefit from the instrument.
To illustrate, look at the following example. Mary dies in 2019 and executed a will in 2013. Assume every asset Mary owns will pass under her 2013 will. At her death, Mary owned a residential house worth $4 million dollars, stock options worth $2 million dollars, and a checking account with $1 million dollars. Under Section 2033 of the Federal Estate tax provisions, Mary’s total estate is worth $7 million dollars.
Now assume that instead of creating a will in 2013, Mary created a revocable living trust. Furthermore, assume all three of Mary’s assets were titled in the trust when she died. Under Section 2036 of the Federal Estate tax provisions, Mary’s total estate is still worth $7 million dollars. Although the provision of the tax code causing inclusion changed, Mary’s estate is still subject to the same federal estate tax. Living trusts fail to exclude your assets from federal estate tax inclusion.
A living revocable trust also fails to provide the grantor with any income tax benefits. As long as the grantor is alive, they essentially own the trust for income tax purposes. Therefore, any income that the trust receives is treated the same way as if the grantor owned the property in their individual capacity.
Additional Taxation on Living Revocable Trusts
In fact, living revocable trusts may be subject to some disadvantages for income tax purposes. First, while an estate may select the fiscal year, a trust must apply a calendar year. This can become a problem because an estate can pour into a trust. This difference can result in the deferral of income taxes on the estate’s income. Second, the taxable income of a trust is subject to a lower federal tax exemption. The federal tax exemption is only $100 or $300 for trusts (depending on the trusts level of complexity), but $600 for estates.
Living revocable trusts fail to provide the grantor with any gift tax benefits. While it is true the grantor does not have to pay any gift tax on the assets transferred to the trust, the grantor would not have to pay any gift taxes on those items if he never transferred his assets to the trust.
Revocable vs. Irrevocable Living Trusts
If you have already looked into creating a trust, you have probably heard of both revocable and irrevocable living trusts. While these accounts have many similarities, there are a few differences that must be highlighted. First, if you want to remove a beneficiary from an irrevocable trust, you must obtain their signature stating that you may do so. If you try to change the terms of an irrevocable trust, the process is similar. In this case, you must obtain every beneficiary’s signature. Essentially, once you create and place your assets into an irrevocable trust, you have transferred ownership of the assets. The second difference between these trusts is the tax benefits. As you immediately transfer your assets when establishing an irrevocable trust, you no longer have to pay tax on the assets.
Each type of trust has its own benefits. If you want to place your assets into a trust for your close family while not worrying about taxes, then an irrevocable trust might be best. However, if you want to maintain some control over your assets until you pass away, you should stick with a revocable trust.
Contact our DC Law Office for More Information
For more information on the basics of living revocable trusts, please contact Antonoplos & Associates at 202-803-5676. You can also directly schedule a consultation with one of our attorneys.