Why doesn’t creating a living revocable trust change an individual’s tax liabilities? Here’s why: the IRS functionally views ownership as whether an individual has control over an asset. With a revocable trust, the same individual holds all the legal positions: trustor, trustee and beneficiary. From a tax perspective, nothing changes while the individual is alive. That means the he or she will continue to file Form 1040 income tax returns as usual; no special tax return is required during the individual’s lifetime.
Let’s look at the roles in a revocable trust more closely. As trustor, the individual creates and sets up the living revocable trust. As trustee, the individual controls how the trust assets are managed and the conditions under which trust income or principal can be paid. As the sole beneficiary, he or she is entitled to receive income and/or principal from the trust.
Notably, the trust document itself does not have to be filed anywhere. Our estate planning law firm recommends the living revocable trust be kept in a safe place. The more important action is to fund the trust. Depending on the type of asset, the account registration or the beneficiary designations should be updated. Typically, that means signing over title to the trustee, on behalf of the trust.
A trustee is bound by the instructions found in the trust documentation. He or she must manage the trust’s assets and make payments to the beneficiaries pursuant to those instructions. Trust documentation typically does not give a trustee absolute power to get rid of a trust. However, with a living revocable trust, the same individual is both the trustor and the trustee. Consequently, he or she retains complete control over the trust assets while living. To avoid the potential for litigation, it is important to carefully document the duties of the trustee and the purpose of the trust. An attorney can help an individual accomplish that.
Source: Wealth Management, “Facilitating Life Settlements,” Jeff Hallman and Scott Thomas, July 25, 2016