Revocable Trust and the gift tax

Revocable Trust and the gift tax

Is there a gift tax consequence to a revocable living trust: I believe Treasury reg. 25-2511-2 answers my concern about any gift tax if a revocable trust first becomes a completed gift upon death as gift tax only applies to completed transfers during the life of the donor.


Revocable living trusts should have no income or gift tax consequence on formation. Because the person setting up the trust (grantor, trustor, settlor) can modify, revoke or change the trust at anytime, the trust income is taxed for income tax purposes to the grantor as if earned by the grantor (i.e., it is a grantor trust). For gift tax purposes there is no completed gift on formation because the grantor can revoke the trust at any time. This should be differentiated from other inter-vivos (while you are alive) trusts that are completed gifts on formation. For a revocable living trust in many cases it will be the grantor who benefits from a substantial portion of the income and principal of the trust in many cases. This is because revocable living trusts are often established to manage assets in the event of illness or disability and hence are for the grantor's benefit, in contrast to many other trusts that are primarily intended to benefit heirs, etc. However, the gift tax consequences to a revocable living trust can be more involved. In many cases revocable trusts grant to trustees and successor trustees (those serving after the grantor) the right and authority to make gifts. This can be done to reduce the grantor's taxable estate. Thus, after it is formed and funded, but even before the death of the grantor, there may be taxable gifts made from a revocable living trust. Some revocable living trusts have very complex and comprehensive gift making provisions. Whatever assets remain in the revocable trust on the grantor's death are included in the grantor's taxable estate (but not probate estate in almost all cases) and are thus subject to estate tax.

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