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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