A revocable living trust is generally disregarded as a separate entity for tax purposes, meaning that the grantor is still considered the owner of the trust assets for income tax purposes. The grantor will report all income earned by the trust on their personal tax return, and the trust does not file its own tax return. Upon the grantor’s death, the assets in the trust are included in their estate for estate tax purposes.
In contrast, an irrevocable living trust is a separate tax entity from the grantor. The trust is responsible for filing its own tax return and paying taxes on any income earned by the trust. This can result in potential tax savings, as the income earned by the trust may be taxed at a lower rate than the grantor’s personal tax rate. Additionally, assets transferred to an irrevocable trust are removed from the grantor’s estate for estate tax purposes.
It’s important to note that there are many factors that can impact the tax treatment of trusts under the IRC, and the specific tax implications will depend on the individual circumstances of each case. It’s recommended to consult with a trust lawyer and a tax professional to fully understand the tax implications of establishing a revocable or irrevocable trust.