How Are Washington Revocable Living Trusts Taxed?

Revocable living trusts are an easy way to transfer your property without the need for probate after you die. In its simplest form, a revocable living trust transfers title to your property from yourself to your trustee for the beneficiary. During your lifetime, you can serve as your own trustee and beneficiary and are free to amend or revoke the trust at any time prior to your death.

But what are the tax implications of a revocable living trust in Washington? Can you use a trust to reduce your income taxes while you are still alive? And how are trust assets taxed after you die?

A Revocable Living Trust Is Not a Tax Shelter

First things first. Placing your assets in a revocable living trust will not help you reduce your income tax obligations during your lifetime. There is a simple reason for this: The IRS disregards any “grantor type trust” when assessing tax liability. A grantor type trust is one where the person creating the trust (i.e., the grantor) still retains significant control over the trust property.

Basically, the IRS still considers any property in your revocable living trust as your property. This means you need to report any income or expenses from the trust on your individual income tax return, similar to a sole proprietorship or a limited liability company. The trust also does not require a separate taxpayer identification number as it will use the grantor’s social security number.

What Happens After You Die?

When the grantor of a revocable living trust dies, the trust becomes irrevocable. At that point, its terms cannot be changed. The successor trustee must also obtain a separate taxpayer identification number for the trust.

Normally, the successor trustee will file a separate tax return, known as an IRS Form 1041, to report any income or tax liability of the trust after the grantor’s death. The trustee can also make what is called a Section 645 election. This refers to a provision of the Internal Revenue Code that allows a qualified revocable trust to be treated as part of the deceased grantor’s probate estate for federal income tax purposes only. This enables the filing of a single tax return for both the estate and trust.

Trusts and Estate Tax

Both the federal government and the State of Washington impose an estate tax on the transfer of a person’s assets upon death. A person’s “taxable estate” is separate from their probate estate. For example, assets in a deceased grantor’s revocable trust are considered part of their taxable estate but not their probate estate. In other words, any assets in a revocable living trust at the time of the grantor’s death are counted as part of their estate for federal and state estate tax purposes (the same as if they were part of the probate estate).

Contact a Spokane Trust Lawyer Today

Revocable living trusts are just one type of trust that can benefit you and your family. While the primary benefit of a revocable living trust is significantly reducing administration hassle and probate, there can be some tax benefit in utilizing irrevocable trusts. Our Spokane trust lawyers will be happy to sit down with you and explain all of your options when it comes to estate planning. Contact Moulton Law Offices, P.S., today to schedule a free consultation. We serve clients throughout the Spokane, Kennewick, and Yakima area.