Who Pays Income Tax on a Revocable Living Trust?

May 23, 2011

One of the main reasons for establishing a revocable living trust is so that assets can be transferred into the trust and, when you pass away, those assets can be distributed to the trust beneficiaries outside of the probate process. But who pays taxes on income earned by the trust assets? Here’s a general overview of how it works:

During Your Lifetime

When you establish a revocable living trust, you’re known as the grantor. Under most circumstances, the property that has been transferred into a revocable living trust is treated as the grantor’s property during his or her lifetime. So, trust income is generally reported under your social security number on your income tax return while you’re alive.

After Your Death

When you pass away, your trust becomes its own, separate taxable entity. One of your successor trustee’s responsibilities will be to obtain a tax identification number for the trust, and to file an annual fiduciary income tax return on its behalf. If the trust makes distributions to beneficiaries then, as a general rule, the distributions are claimed as deductions by the trust, and they would be taxable to the beneficiaries on their individual income tax returns. On the other hand, trust income that is not distributed to beneficiaries is taxable to the trust.

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