The revocable living trust is a very versatile estate planning solution that can be the right choice for a wide range of people. We are going to look at the tax question in this post, but before we get there, we will explain some of the benefits that living trusts provide.
Streamlined Estate Administration
When you have a living trust, the assets that comprise the estate will be owned by the trust, and this streamlines the estate administration process.
You can account for assets that you may never convey into the trust through the inclusion of a pour-over will. This document would transfer these resources into the trust after your passing.
Assets in the trust can be distributed to the beneficiaries outside of probate. This is a costly and time-consuming process that enters the picture when you use a will as your sole asset transfer vehicle.
More than one third of people that are 85 years of age and older have Alzheimer’s disease, and this is not the only cause of cognitive impairment. And of course, some people encounter these challenges before they enter the ranks of the oldest old.
You can account for this possibility when you have a living trust. Why you are alive and well, you would act as the trustee, so there would be no loss of control.
When you are drawing up the trust agreement, you can name a disability trustee. This individual or entity will step into the role if it ever becomes necessary.
The inheritance that you are going to leave to a beneficiary can be protected through the inclusion of a spendthrift clause. After you are gone, the trust would become irrevocable, and the beneficiary would have no direct access to the assets.
Creditors of the beneficiary would “step into their shoes.” Since the beneficiary would not be able to reach the principal, the creditors would be in the same position.
They would be able to go after assets after they have been distributed. To account for this, you could instruct the trustee to provide limited incremental distributions.
Taxes on Living Trust Distributions
Now that we have provided a basic overview, we can focus on the point at hand. The assets that you originally conveyed into the trust were in your possession after you paid taxes throughout your life. For this reason, distributions of the principal would not be subject to regular income taxes.
However, earnings that are generated by assets in the trust would be taxable. The trust itself would pay taxes on undistributed earnings, and the beneficiary would be required to claim distributions of the earnings.
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