A revocable trust is a form of estate plan where the owner puts all their assets in a trust and does whatever they want with it. It’s very flexible because the assets can be taken out anytime and the divisions of the estate do not have to go through probate. The assets are immediately transferred to the named beneficiaries.
The flexible nature of a revocable trust means there aren’t any tax consequences. This makes it attractive to people, especially those with families. However, this doesn’t come without a down sidel — there are also no tax benefits. There are three tax-related things that anyone with a revocable trust needs to remember.
1. Estate taxes
A lot of people think that a revocable trust is not subject to taxes at death, particularly estate taxes or inheritance taxes. But that’s not true. The revocable trust itself is not going to help the owners skip estate taxes. However, there are tools within the trust that can be used to mitigate them.
2. Income taxes
Another misconception people have about revocable trust is that if they put their accounts into their trust and pay dividends, interest, etc., they won’t have to claim these as income tax or going to be taxed at a better rate.
But this is not true. These dividends and interest expenses are taxed under the owner’s social security number. The revocable trust is a see-through entity that has nothing to do with any sort of tax benefits and consequences. So dividends or interest paid for a business or a rental property in their trust will still go to the owner’s personal taxes or social security number.
3. Property taxes
Real estate is the number one thing that causes probate. So putting a home in a revocable trust is a good estate plan to prevent the asset from going through the tedious administrative process. However, many people have the concern that if they put their homes in their revocable trust, they will not get to enjoy the homestead benefits, such as homestead taxation.
But this is also not true. There is a statute setting forth that a home owned in a revocable trust is still owned for homestead purposes. Some instances in the county require the homeowner to submit a new homestead application to show that they are still residing in the place even after changing the ownership to a revocable trust. This is fine as it does not change anything about the owner’s property taxes, income taxes, or estate taxes.
A revocable trust is a very attractive estate plan, particularly because it helps avoid the lengthy and expensive process of probate. But to truly benefit from it and maximize the trust, people should be aware of these tax-related things.