The Biggest Myth of a Living Trust

Living trusts have become popular estate planning tools over the past few decades, but unfortunately, misinformation and aggressive advertising and sales tactics have been all too common. In particular, the biggest myth of a living trust is the claim that living trusts have many tax advantages.

Living Trusts and Income Taxes

There are no income tax advantages to creating a living trust. You will pay income taxes on the income the trust earned since you have a control and interest in the trust property. In fact, your social security number is the identification number for the trust, and the trust’s income and finances are normally reported on your personal income tax return.

This is the case since a living trust is a revocable trust, and as long as you retain the power to revoke or modify the trust, it is still considered yours for tax purposes. But when you die, you can no longer pay income taxes, so the trust becomes a separate tax entity and pays its own income tax.

Living Trusts and Estate Taxes

Assets in your revocable living trust will be considered part of your estate and will be subject to estate tax. Whether estate tax will have to be paid will depend on whether your estate is valued above or below the current federal estate tax exclusion amount at the time of your death. While this amount in 2011 and 2012 is $5,000,000, the law is currently slated to change at the end of 2012, so the future exemption, once again, is uncertain.

If you control the trust – you, or your estate, will pay income and/or estate taxes on the assets in the trust – just as if they were personally owned by you – but an irrevocable trust can be a whole different story. It is important to note that, for a married couple, a revocable living trust may double the amount of money that you can pass tax-free, depending on what year you pass away.

While a living trust can be a powerful estate planning tool, it’s important to know the facts and use it for the right reasons, and a trust attorney can help you find the right trust for your needs.

Hammond Law Group, LLC – Revocable Trusts in Colorado Springs and Denver CO