This Trust Avoids Tax

20 Feb 2023 · 1 min

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In this brief instructional video, the speaker explains how a revocable living trust is treated for income tax purposes. The IRS disregards the trust while the grantor is alive, meaning the trust has no separate tax identity and all income, deductions, and credits are reported on the grantor’s personal tax return using their Social Security number. Consequently, transferring assets into or out of the trust does not trigger capital gains or other transfer taxes during the grantor’s lifetime. The speaker notes the downside that the grantor must still pay any income tax owed, but emphasizes that the trust itself does not generate separate tax liabilities.

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Income taxes. Very few people enjoy paying income taxes. Most people want to avoid them. There is a trust that avoids income taxes. A revocable living trust avoids income taxes while the person is alive who made the trust. A revocable living trust is disregarded by the Internal Revenue Service. There is a downside, however, because you still have to pay taxes under your Social Security number. But still, when you transfer assets in and out of a revocable living trust, no capital gains taxes or other taxes are assessed. But if there is any income, it flows straight to you.