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How do taxes work in a Living Trust?

How do taxes work in a Living Trust?

By 

Jennifer Mcgee

·

Updated on  

January 3, 2023
·

8 Mins

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What is an estate tax?

The tax that is levied on a deceased person’s assets is known as an “ Estate tax”.

Estate Tax is applicable at the federal as well as State levels in some states. So, even if you are exempted from Federal tax, you might be required to pay the state-level tax in some states. 

The Federal Estate Tax exemption for the year 2022 ranges from 18%-40% and generally applies to assets over $12.06 million.

In the year 2023, this exemption will be $12.92 million.

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States with Estate Taxes

STATE

EXCLUSION AMOUNT IN 2022

Connecticut

$9.1 million

District of Columbia

$4.25 million

Hawaii

$5.49 million

Illinois

$4 million

Maine

$6.01 million

Maryland

$5 million

Massachusetts

$1 million

Minnesota

$3 million

New York

$6.11 million

Oregon

$1 million

Rhode Island

$1.64 million

Vermont

$5 million

Washington

$2.19 million

Can I avoid estate taxes with a basic living trust?

A basic Revocable Living Trust does not avoid Estate Taxes. Its main objective is to avoid Probate only. The reason it is common among people is its flexibility. The Grantor can alter or add changes to it anytime before his death.  

There are several Irrevocable Living Trusts which avoid Estate taxes. AB Trust is a classical example of this.

AB Trusts are Trusts made by married couples jointly to avoid Estate Tax. The term “AB” has been given to these trusts because upon the death of one spouse, this Joint Trust splits into 2 Trusts, namely Trust A and Trust B.

Trust A - Survivor’s Trust

Trust B - Decedent's Trust

The surviving spouse has little control over the Decedent’s Trust but he can still take a few advantages. For example- receive income from the decedent’s trust or continue to live in the house of the decedent, etc. Provided that all these things are written in the Trust document of the Decedent.

So, from the above discussion, we can conclude that the primary goal of AB Trust is to avoid “Double Taxation” and make sure that the benefits of the Trust are given to the appropriate Beneficiary, which is usually the spouse in most cases.

Tax consequences of a Living Trust

1. Income Tax

IRREVOCABLE LIVING TRUST 

REVOCABLE LIVING TRUST 

If Grantor is the trustee, he will be treated as the owner of the assets put into the trust and will be required to pay taxes against those assets as he was doing prior to transferring the assets into the trust.


If any other person is the trustee, the grantor is not required to pay income tax on those assets but the trustee has additional tax reporting requirements.

Income tax is to be paid by the Grantor whether he is the trustee or not. 

2. Gift Tax

IRREVOCABLE LIVING TRUST 

REVOCABLE LIVING TRUST

Grantor will pay gift taxes when assets are transferred into a Trust.

Grantor is not required to pay gift taxes in revocable trusts but will be taxed as part of the Grantor's Estate. 

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Frequently Asked Questions

What is an Income tax?

The income tax is levied by the government on a business or individual upon the income or profit earned by them.

What is a Gift tax?

A gift tax is a federal tax levied on a person who transfers property to another individual without consideration.

Who is a Grantor?

A grantor is a person who creates the Living Trust.

Can I transfer cash to a Living Trust?

No. You cannot add cash directly to a Living Trust. You will need to put them into a bank account and then add that bank account to the Trust.

Do Living Trusts avoid Probate?

Yes. Living Trusts avoid Probate. Courts have no intervention in the process of distribution of assets among the beneficiaries.
Jennifer Mcgee
Parent to five young children. Expert in Estate Planning, Probate, and Family Law Matters. Volunteer with Victim’s Advocates in the local sheriff's department...
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