Is There an Inheritance Tax on Living Trusts?

The untrusting trustee

Trusts are a legally created entity that allow people to organize specifically how their wealth will be used either upon their death or during life. Trusts provide many benefits that wills cannot, including greater privacy, security for trust-held assets, and with certain trusts, elimination of inheritance taxes.

Definition

A trust is an entity created by a decedent and managed by a trustee for the purpose of controlling the distribution of assets.

Revocable Trust

A revocable trust is created during the life of the trustee and can be revoked at anytime. This means that the trustee has the power to remove assets from the trust without penalty. Assets in the trust are not taxed until the time of death.

Irrevocable Trust

An irrevocable trust may not be revoked once it is created. The assets are placed permanently into the care of the trustee and are taxed at the time of creation.

Intervivos Trust

An intervivos trust is a trust placed into a will of the decedent. It will not be established until after death, therefore estate taxes will apply.

Profit

Any profit gained by a trust is taxable, similar to profit gained by any other investment.

Probate

Irrevocable trusts established during the life of the decent will not go through probate.

References

• IRS: Trusts
• "Estate Planning Principles and Problems"; Wayne M. Gazur; 2008.