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Taxes and your trusts

You may have joined other Oregon residents during 2018 and created an estate plan that included a trust. Depending on your needs, you created either a revocable or an irrevocable trust. A revocable trust allows you to make modifications and changes to it during your lifetime. For this reason, the IRS considers you the legal owner of the assets transferred into the trust.

If you created an irrevocable trust, you surrendered all ownership of the assets transferred into it. As an aside, your revocable trust may become irrevocable after your death. In any case, the tax treatment of each type of trust is different. Knowing the rules could help you stay out of trouble with the IRS.

Taxes and the revocable trust

Since the IRS considers you as the legal owner of your trust's assets, you must report gains and losses associated with those assets on your income tax return. Any other named beneficiaries have no tax obligations regarding the assets in the trust since you pay them. When you pass away and the trust becomes irrevocable, its tax status changes as well.

Taxes and the irrevocable trust

In an irrevocable trust, the provisions you outlined in it control how the trustee makes distributions to beneficiaries. Since the irrevocable trust owns the assets in it, you must obtain an employer identification number, or EIN, for it. This number is the trust's identification to the federal government and others. During tax season, the trustee files a tax return for the trust each year it exists.

As long as beneficiaries do not remove assets from the trust, they incur no tax obligations simply for being a beneficiary. When receiving distributions, however, the tax basis resets to the date of the distribution. The beneficiary may then owe income tax on the assets received. Moreover, no estate taxes come due on the assets held in the trust, since they are not part of your estate upon your death.

Making sure it's done right

This article provides a broad outline of how to treat trusts for tax purposes, depending on whether they are revocable or irrevocable. In order to make sure that no one pays more taxes than necessary, it would benefit you greatly to obtain a more detailed explanation regarding the tax implications associated with the trust you create. Doing so could save you and your beneficiaries time and money now and in the future.

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Lockbox Tax Service
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Portland, OR 97214

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