By: Martin M. Shenkman, CPA, MBA, JD
Perhaps the most commonly used trust is a revocable living trust. This generally will not present any significant tax or legal issues because the trust is a "grantor" trust for income tax purposes. If the client establishes a revocable living trust, it will be characterized for income tax purposes as a grantor trust because the client will retain complete power to manage the assets, revoke the trust, etc. Thus, the client will have to report all of the income from the trust (e.g., a rental of part of the home) on the client's personal tax return. This can significantly simplify the tax reporting requirements. When a trust is taxed as a grantor trust for income tax purposes, the income, gain, and losses of the trust are reported on the grantor's (the client's) personal income tax return. Where the powers the client retains over the trust are sufficient, the income earned by the trust will be taxed on the client's personal tax return, and not on a separate tax return filed by the trust. Grantor trust status for income tax purposes is not always negative. For example, there generally will not be any income tax consequences to transactions between the grantor and the trust. Thus, if the client transfers appreciated property to a revocable living trust which is taxed as a grantor trust, there will be no income tax cost to doing so.
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