How are Trusts Taxed?

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What Is a Revocable Living Trust?....5

In estate law, trusts are taxed differently depending on whether they are revocable or irrevocable trusts. Learn how a trust is taxed from an estate planning and probate lawyer in this free video on estate law.

Part of the Video Series: Estate Planning
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Video Transcript

So how are trusts taxed? Well different kinds of trusts are taxed different ways. Taxes on trusts are typically broken into two categories, the two main categories of trust. Revocable trust and irrevocable trust. The vast, vast majority of trusts that are out their are revocable trusts. Sometimes people call them irrevocable trusts, they are really revocable, changeable trusts. If you have revocable living trust then it's going to be taxed to you. There's not a special tax id number, you use your social security number. You don't pay any additional tax, your CPA does not file a special tax return. It's invisible to the IRS. The IRS frankly could care less whether you have a revocable living trust or not. Now when it comes to estate taxes, we can put some things that are living trusts to save the state taxes. But we can put those same things in a will to save estate taxes. But from an income tax perspective, a living trust is tax neutral. When you transfer your assets to your trust it's called trust funding. You don't recognize capital gains taxes either. You don't recognize gift taxes when you put them in if your kids ultimately are beneficiaries of this revocable trust. So they are tax neutral from income taxes, they are tax neutral from gift taxes, they are tax neutral from capital gains taxes. Irrevocable trusts are a lot different. If it's a true irrevocable trust it may have a tax id number, and so it may pay more taxes, trust tax rates for irrevocable trusts are a lot higher. When you transfer assets to an into an irrevocable trust in fact you may pay capital gains taxes. You may pay gift taxes. So irrevocable trusts are a lot more sophisticated your going to need the help of a CPA and a qualified estate planner who can set up and maintain irrevocable living trust. Nothing to it from a tax perspective. No tax id number, no taxes when you transfer property in, not transfer taxes or any taxes when you transfer property out.


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