A living trust is a legal document that outlines how assets will be distributed or managed after death or in the event of incapacitation. It is an essential estate planning document that will help your heirs avoid probate or conservatorship. However, many people don’t know more about this document and its tax obligations. Keep reading to learn more.
What is a Living Trust?
A living trust is an estate planning document that puts your assets and finances in a trust. The document also outlines how your assets will be managed and distributed to your heirs after death. The person creating the living trust is the grantor, and the one appointed to oversee the trust is the trustee. But the grantor can be the trustee of the trust while alive but must name a successor trustee to manage the trust after passing away.
Living trusts come in different forms. The main types are revocable and irrevocable trusts. Revocable trusts can be changed or canceled by the grantors while they are still alive. On the other hand, irrevocable trusts cannot be altered or revoked after signing. Please note that revocable trusts, where the grantors retain control of the assets, are mainly used for tax purposes.
Living Trust Tax Filing Requirements
If the assets you put in your living trust generate an income of more the $600 during a year, you are supposed to file federal income tax and pay taxes. The trustee files Form 1041 to report the trust’s income. It is also advisable to note that even if the trust doesn’t report $600 income, it must file a return if it has a nonresident alien beneficiary.
But there are exceptions;
First, if a grantor retains control over the assets in the trust and reports the trust’s income on Form 1040, the trust should not file federal income tax. This is because the income tax is covered on Form 1040, and they have taken responsibility for the taxes due.
Another exception is about a revocable marital living trust. If both parties have reported the trust’s income while filing their returns, the trust doesn’t need to file Form 1041.
But if one of the spouses dies, a portion of that spouse’s assets in the living trust becomes irrevocable. And that means the trust must file a Form 1041 for that year reporting the assets and income from the deceased’s portion of the trust assets.
The surviving spouse must pay the federal income taxes due. After that year, the surviving spouse will continue to file tax returns and pay taxes as per their income.
It is also worth noting that trusts provide Form Schedule K-1 to the beneficiaries. And the beneficiaries must report any receipts from the trust while filing their returns.
If you want to create a living trust easily, Forms.legal can help you do that. We offer revocable living trust templates for different states. You just need to complete the online form, download & print it, and sign it before a notary public.