Revocable Living Trusts and Your Home – Quick Intro

TRANSFERRING THE HOUSE TO A REVOCABLE LIVING TRUST

Perhaps the most commonly used trust is a
revocable living trust. This generally will not present any
significant tax or legal issues because the trust is a “grantor” trust for
income tax purposes. If the client establishes a revocable living
trust, it will be characterized for income tax purposes as a grantor trust
because the client will retain complete power to manage the assets, revoke the
trust, etc. Thus, the client will have to report all of the income
from the trust (e.g., a rental of part of the home) on the client’s personal
tax return. This can significantly simplify the tax reporting
requirements. When a trust is taxed as a grantor trust for income
tax purposes, the income, gain, and losses of the trust are reported on the
grantor’s (the client’s) personal income tax return. Where the
powers the client retains over the trust are sufficient, the income earned by
the trust will be taxed on the client’s personal tax return, and not on a
separate tax return filed by the trust. Grantor trust status for
income tax purposes is not always negative. For example, there generally will
not be any income tax consequences to transactions between the grantor and the
trust. Thus, if the client transfers appreciated property to a
revocable living trust which is taxed as a grantor trust, there will be no
income tax cost to doing so.