The Elrod Firm


Taxes and Trust

Lindsey, I’m interested in a living trust, but everyone keeps telling me that a trust will make my income taxes go up. Is this true? – John

John, the best lawyer answer I can give you is it depends.  It’s true that some trusts can change your tax liability, but it all depends upon the kind of trust you have and its terms.  At the Elrod Firm, we do everything we can to ensure that your trust won’t negatively affect your tax liability.

First, 99% of the time when clients want a trust to avoid probate, they are referring to a revocable or living trust.  A living trust is one where the creators of the trust have the power to change or amend the trust over time, can serve as the managers or trustees of trust assets, and can also be the primary beneficiaries of the trust during their lives.  Because of this,  if any trust assets earn income, it can continue be reported on the creators’ joint tax return.

What does this mean in layman’s terms? If structured properly, a living trust will NOT change your tax liability whatsoever. 

When it comes to irrevocable trusts, your attorney has to be much more careful in the drafting language to keep your tax liability as low as possible.  This is because irrevocable trusts are required to have their own tax ID number and generally report their income separately using a much higher tax bracket.

In some instances, though, your attorney can choose to make even your irrevocable trust something called a “grantor trust.” This way, you can still report any trust income on your personal tax return, keeping your tax liability the same.  Other times, this is not possible, but by passing trust income through to the lifetime beneficiaries of that irrevocable trust, you can still often minimize your income tax liability.

The bottom line is this: whenever creating a trust, it’s important to have the right attorney as a partner.  At the Elrod Firm, we are experienced and ready to help you make a plan.  Call us today for your free strategy session!

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