Georgia and South Carolina estate planning clients frequently ask whether creating a revocable trust saves income tax or estate tax.  The answer is that generally, revocable trusts do not avoid income or estate taxes.  Here are some of the rules about revocable trusts and taxes.

Trustees of revocable trusts are required to file annual income tax returns; but if the grantor or the grantor’s spouse is a trustee, the income and deductions are reported on the grantor’s personal tax return instead of a trust tax return.  So, the trust uses the grantor’s social security number instead of obtaining a separate tax ID number.

During the grantor’s lifetime, there are no significant income tax consequences of the revocable trust.   The grantor trust rules result in the grantor being taxed on the trust income whether or not the income is distributed from the trust.   Similarly, transferring your property to your revocable trust won’t typically be considered a taxable event which would trigger tax due on gain.  If you transfer your principal residence to your revocable trust, you would still be entitled to tax advantages available upon sale of your principal residence.

Transferring property to your revocable trust does not have immediate gift tax consequences, but a gift is made if the trust property is then distributed to someone else.  Property transferred to a revocable trust is included in the grantor’s gross estate for estate tax purposes.

If you transfer your residence to a revocable trust, it should not affect your eligibility for Georgia homestead exemption.

There are often non-tax considerations involved in creating revocable trusts.  A revocable trust can offer some creditor protection, especially for claims that arise after transfer of the property to the trust.  Additionally, the trust vehicle offers greater privacy than probate and is less vulnerable to attacks based on undue influence or mental incapacity.  Finally, the revocable trust can provide for management of your assets in the event of your incapacity.

© Karen S. Hindson, Hindson & Melton LLC   October 26, 2013