Revocable trusts are a type of business entity available in the United States. Trusts are not designed to conduct business. They are often designed to hold and distribute assets between family members or for charitable purposes. An individual called a trustee acts as a fiduciary for the trust, overseeing the assets and operations of the company.
Taxation of the Trust
All revocable trusts are considered grantor trusts for federal tax purposes. In a grantor trust, the benefactor has some degree of control over the company. The grantor of a grantor trust may retain the ability to revoke the trust or control who receives disbursements. If a revocable trust reports more than $600 in company income and the owner does not report this income as his own, then the trust must file Form 1041 with the IRS to report the earnings.
Taxation of the Grantor
In most cases, the grantor of a revocable trust reports all the company's earnings on his personal tax forms. If the grantor reports this income, the trust has no need to file an annual report or pay taxes on company income. Instead, the grantor reports income gained from ownership of the trust as income generated from self-employment on IRS Form 1040.
Protection from Taxation
Revocable trusts are often used to hold and shelter assets from taxation. Federal and state governments levy inheritance and estate taxes on assets transferred to family members through a living or standard will. A revocable trust can expedite the transfer of assets according to a living will all while avoiding the taxation that normally accompanies such a transfer.