One of our client's most common questions is, "How are revocable living trusts taxed?"
Creating a revocable living trust is an excellent way to safeguard your future, but it could have tax implications for your estate. In this article, our legal team explains revocable living trusts and the potential tax implications and benefits in North Carolina.
What Is A Revocable Living Trust?
When it comes to creating a revocable living trust, the DIY tactic is never advisable. With the recent tax reforms in the U.S., understanding how to protect your assets and pay taxes on them correctly is more important than ever.
A revocable living trust is created by you—the grantor—and transfers assets into that trust. Common assets include valuables, jewelry, real estate, bank accounts, brokerage accounts, bonds, and stocks. When creating a trust, most people name themselves as the primary trustee and then designate a successor trustee. The successor takes control of the trust should the grantor become incapacitated or pass away.
Here are some critical factors regarding your role as grantor to your revocable living trust:
- You can amend, change, or dissolve a revocable trust at any point during your life without going through the courts.
- You maintain control over your assets and can move them in and out of the trust at will.
- As the grantor, you will receive trust income and principal after transferring your funds into the revocable living trust.
How Are Revocable Living Trusts Taxed?
Fortunately, setting up a revocable living trust doesn't have much of an effect on your income taxes. In North Carolina, revocable living trusts are a pass-through tax item. This means that you include the trust on your taxes rather than making a separate filing for the trust. The trust exists under your Social Security number rather than having a separate tax identification. So you would simply file your taxes as usual and declare the value of your trust as part of your assets.
North Carolina has no estate or inheritance tax at the state level. However, extremely high-net-worth individuals or families ($11.7 million for singles and $23.4 million for couples) may have to pay the federal estate tax.
A knowledgeable estate planning attorney can help you determine the best plan for establishing a revocable living trust in North Carolina and help you understand your tax burden during life as well as any taxes that may be owed when your family inherits the trust. Remember, you have the power to move your funds in and out of your revocable living trust whenever you want. As a result, you can expect your taxes to remain the same, and you'll still file in the same manner you usually do.
What Happens To A Revocable Living Trust After Death?
When you pass away, your trustee will need to file a separate tax return for the trust. The trust will become a taxable entity in its own right on your death, and your trustee will need to procure a tax ID for the trust and file a final income tax return for the trust.
If the trust disburses assets to beneficiaries, those can be claimed by the trust as deductions and must be claimed by the beneficiaries on their individual tax returns to be taxed. Income not distributed is still taxable to the trust.
Tax Advantages And Benefits Of Including A Revocable Living Trust In Your Estate Plan
There are many advantages to setting up a revocable living trust as part of your estate plan, including certain tax advantages:
- Revocable living trusts protect your financial assets from creditors and debt collectors. On your death, your trust will be executed by your trustee.
- You can declare your future wishes and ensure that your financial assets go to your beneficiaries upon your death, avoiding the hassle of probate, the system where the state uses the value of your estate to pay creditors, taxes, and bills after your passing.
- Building a revocable living trust lets you hypothesize, evaluate, and plan for all types of income tax scenarios while you’re alive and pay income tax for the trust.
Finding A North Carolina Trust And Estate Planning Attorney Near Me
At Carolina Family Estate Planning, we help you with all your estate planning needs. Although a revocable living trust may not dramatically impact your taxes, it's still crucial for you to understand the benefits a trust provides and how the IRS taxes them.
Call our Carolina Family Estate Planning team today at (919) 443-3035 or complete our contact form to schedule a needs assessment.
The information in this blog post (“post”) is provided for general informational purposes only and may not reflect the current law in your jurisdiction. No information in this post should be construed as legal advice from the individual author or the law firm, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting based on any information included in or accessible through this post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.Copyright © 2022. Carolina Family Estate Planning. All rights reserved.