When you fund property into a Revocable Living Trust, you transfer ownership of property from your name into the name of the trustee. Typically, you serve as the trustee while you’re alive, so that you control the property and retain all the benefits of property ownership. And because the trust is revocable, you can cancel the trust and transfer the property back into your individual name at any time.
Under IRS rules, the only way you can avoid being taxed on the property in a trust is to give up:
(1) control and benefits of the assets you place in the trust, and
(2) the right to revoke or amend the terms of the trust.
Since a Revocable Living Trust does not meet either of the above requirements, the IRS treats the trust property as your individual property for tax purposes.
So, if you’re married and file jointly, then you’ll continue to file your usual 1040 form, and you’ll report any trust income as your personal income.
While there are no income tax benefits associated with funding property into a Revocable Living Trust, there are numerous other advantages. A Revocable Living Trust offers you the ability to avoid the time-consuming and expensive probate process; it allows you to keep your personal affairs confidential; and it lets you plan for disability without the need for court interference.
It’s important to keep in mind that, in order to be effective, your trust must be properly funded. Any questions you may have concerning Revocable Living Trusts can be answered by a qualified estate planning attorney.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.