Will a Revocable Living Trust Help to Avoid Taxes?
In and of themselves, trusts do not avoid taxes, but they help to carry out good tax planning. As far as income taxes go, revocable living trusts are “tax neutral.” During your lifetime, your trust will not need to file its own income tax returns. The taxpayer identification number for your trust is your Social Security Number, and you simply report all trust income on your individual Federal and State income tax returns.
Whether you have a trust or not, your estate may be subject to estate tax and generation-skipping transfer tax. The estate tax is a tax on your failure to spend your last nickel by the same time as you exhale your last breath. If you are a U.S. resident, the law gives you an exclusion from the Federal estate tax (we like to call it your estate tax “coupon”) that enables you to shelter a certain amount of assets from the tax.
The aptly-named generation-skipping transfer tax (“GST”) is piled on top of any applicable gift or estate taxes on transfers to individuals who are two or more generations younger than you and can result in a lot more going to the IRS than goes to your loved ones.
Today’s Answer was provided by Scott A. Makuakane, Esq., CFP, of Est8Planning Counsel LLLC in Honolulu, Hawaii.