In Greensboro, North Carolina, revocable living trusts are used to avoid probate (court supervised estate administration) at death, and to reduce the time delay and costs involved in transferring assets to the trust beneficiaries. But if you set up a revocable living trust, will that require a change to your income tax reporting? Will you need to file a separate income tax return for your revocable living trust? And who pays the state or federal tax on income earned by the trust assets?
Here is a brief summary of how income taxes should be filed for a revocable living trust in Greensboro, and the rest of the state of North Carolina.
While you are enjoying life in Greensboro, North Carolina
When you create a revocable living trust, you sign a document as the “grantor” (that’s the person who creates a revocable living trust). Under the terms of the trust, you can amend or even revoke the trust (that’s why it’s called a revocable trust). In addition, when you’ve transferred your personal assets into the trust, you’ll still be entitled and eligible to receive the trust income and principal.
As a result, IRS rules require that you’re still taxed on all of the income earned by the trust assets. That means your own Social Security number will be used for the trust’s bank accounts and investments. It also means that as long as you live, all of that income should be reported in your personal tax return. You won’t need to file a separate federal tax return for the trust.
Isn’t that a relief? Your revocable living trust will not complicate or change your North Carolina tax situation. However, even though the IRS considers these trust assets to be assigned to you personally, the assets in the trust will avoid probate estate administration at your death.
Although revocable living trusts won’t necessarily change the way your North Carolina taxes work, it’s important to consult with an experienced revocable trust attorney and understand how your trust operates. Trust and estate planning can help you:
- Better plan for your beneficiaries after your passing
- Evaluate income tax scenarios
- Choose the trust arrangement that works best for your situation
Setting up a trust to protect your estate or assets, or having an older trust reviewed, is easier than you may think with a revocable trust attorney from The Elderlaw Firm. If you had the foresight to set up a revocable living trust years ago, it’s likely time to re-evaluate it against updated tax and estate regulations – especially if you established a trust with someone who isn’t a revocable trust attorney.
It’s time to set up or update your estate plan to protect your legacy and loved ones
Older wills, trusts, and estate plans should be reviewed every few years to ensure they’re up-to-date with the most current estate laws. You don’t want to burden your loved ones with complicated tax situations, disputed government benefits, and more difficulties after your passing. Grantors may believe they enjoy certain tax benefits depending on the tax laws, however, those tax laws may be out of date. Contact us today to schedule an appointment to discuss trust options and get answers to your estate questions.
After the death of the grantor
When you die, the trust will continue. In North Carolina, after a passing, the trust becomes its own separate taxable entity and as a result, it will need its own taxpayer identification number. Your final tax return will be filed by your executor or trustee for the income earned through your death. The income earned by trust assets after your passing will be listed on the trust’s own, separate income tax return. The trust will need to file an annual fiduciary income tax return (on Form 1041).
Ensure that your loved ones avoid the probate process when it’s time to transfer assets to beneficiaries
When the now irrevocable trust makes distributions to beneficiaries, the trust will deduct from its income the distributions that were made. The beneficiaries will recognize a portion of the distribution received as income on their own income tax return. It is important to note that not all of the distribution is taxable to the beneficiary. The distribution is taxable only to the extent that it represents income that the trust assets earned. The rest of the distribution is a nontaxable return of premium.
The beneficiaries will need to wait until they receive a report from the trust about the income to be reported on the beneficiary’s own individual income tax return. If the beneficiary files his or her North Carolina tax return too early and fails to include his or her share of trust income, the beneficiary will need to file an amended trust tax return (Form 1040X).
If the trust does not make distributions to beneficiaries, then the trust will pay taxes on its own income. In that case, the beneficiaries will not need to report income from the trust since they did not receive a distribution.
If you live in Greensboro, North Carolina, or the Piedmont Triad area and have questions about income taxes on a revocable living trust or any other estate planning matter, you may benefit from the expertise of the Elderlaw Firm. Our estate planning services include tax planning and asset protection to ensure your assets are in order and your loved ones financially protected before and after your passing. We can draft revocable and irrevocable trusts for estate planning, and help you make the best decision based on your unique circumstances.
The Elderlaw Firm understands probate and trust laws. We have been providing North Carolinians with everything they need to make smart, cost-effective decisions for their estates for decades. Our revocable trust attorneys are more than capable of helping you, too. Visit our Greensboro office today to see how we can help!