Taxation of Revocable Living Trusts

Taxation of Revocable Living Trusts refers to the tax treatment of assets held within a revocable living trust during the grantor’s lifetime.

A revocable living trust is an estate planning tool that allows the grantor to retain control over the assets placed in the trust. For tax purposes, the Internal Revenue Service (IRS) treats the trust as a "pass-through" entity. This means that any income generated by the trust’s assets is reported on the grantor’s personal tax return, typically using their Social Security number. As a result, the grantor is responsible for paying any taxes on the income generated by the trust while they are alive.

For example, if the revocable living trust holds rental properties that generate income, that income is reported on the grantor’s individual tax return, and any associated expenses can also be deducted. Upon the grantor’s death, the trust may become irrevocable, and different tax rules may apply regarding the taxation of the trust’s income and distributions to beneficiaries.