Living Trusts and Taxes

Perhaps you've read about an estate planning tool called a living trust. It is often recommended to individuals who want their assets to be professionally managed should they become disabled. A properly implemented living trust also avoids probate, which can be a time consuming and expensive process.
 
As its name implies, a living trust is created during a person’s lifetime rather than by will. Typically, the person who creates the trust not only benefits from the trust, but also reserves the right to revoke it and may serve as the initial trustee or co-trustee. So, while the trust may provide planning advantages, the trust creator still effectively controls the trust assets. For this reason, a revocable trust has little impact on the trust creator’s tax situation.
 
Unlike some other types of trusts, a revocable living trust does not save estate taxes. The trust assets must be included in the trust creator’s gross estate for federal estate tax purposes. Even though another beneficiary (a child, for example) may one day benefit from the trust, the transfer of assets to the trust is not a taxable gift.
 
The trust creator generally continues to report and pay taxes on income from assets transferred to the trust on his/her personal tax return. If a charitable contribution is made from the trust, the trust creator may deduct it (within tax law limits). The trust itself generally does not owe income taxes.