Does The Revocable Living Trust Reduce Income Taxes Or Estate Taxes?

During the grantor`s lifetime, the revocable living trust has no effect on the income tax which the grantor will owe. In fact, if the grantor is the trustee or a co­trustee, all income earned on assets held in the trust is reported directly on the grantor`s income tax return and the trust is not required to file a return. After the grantor`s death, the trust is taxed at the same rate as a probate estate. However, as mentioned above, a probate estate may enjoy certain relatively minor income tax advantages. Regarding the estate tax, proper planning can often reduce the amount of tax payable upon the grantor`s death. For the most part, estate tax planning can be equally accomplished through proper drafting in either a will or a revocable living trust. However, there are minor differences. For instance, under current tax rules a lifetime gift directly from a living trust to a donee will be subject to estate tax if the grantor dies within three years of making the gift. This three­year rule does not apply to gifts made directly from an individual to a donee.

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