Everyone wants to know.
A revocable trust is not a separate entity from you for tax purposes. It is a separate entity for probate purposes meaning that it can take over if you are disabled or you die, without having to go to court. However, until your death, it is invisible as far as taxes go.
If you have an irrevocable trust, created either in life or when you die (your revocable trust becomes irrevocable), that trust has its own Tax Identification Number. It will pay taxes on any income earned by the trust as a separate tax paying entity.
Trust income is taxed at the highest tax bracket applicable to individuals as soon as there is over $12,950 of income, so in some cases a trust can be drafted to provide that the tax consequences pass through to the beneficiary and are taxed at his or her rates. We will often do this when creating a Lifetime Asset Protection Trust for a beneficiary, so that the trust can provide the benefits of credit protection from lawsuits, divorce, or even bankruptcy, but not have the negative tax consequence of the highest tax rates on very little income.
What about estate taxes? Today, the exemption is $11.58M. If you die with more, your estate will be subject to estate tax on all amounts over that $11.58M at the rate of 40%. Yep, 40% will go to the government! You can mitigate these taxes, or even eliminate them by using various planning methods, most of which are complex, but worth it if you can save your family that 40% estate tax.
Which is right for your family? Will your heirs benefit from a Lifetime Asset Protection Trust? Do you need to save your family from excessive estate taxes? Do you need a Revocable Trust to keep your family out of court and out of conflict?
This article is a service of Truest Law. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Wealth Planning Session, during which you will get more financially organized than you’ve ever been before, and make all the best choices for the people you love. You can begin by visiting our website at Truestlaw or by calling our office at 480-949-6500 and mention this article to find out how to get this $750 session at no charge.