Tax Consequences for Revocable & Irrevocable Trusts

by Jack Ori

A living trust is an estate planning tool in which you put money aside for your beneficiaries after your death. Living trusts do not go through the probate process, so in many cases your beneficiaries get their inheritance right away if it is in a trust. There are two types of living trusts: revocable, meaning you can change the terms while you are alive, and irrevocable, meaning that you cannot change the terms once the trust is set up. Revocable trusts are subject to taxes that do not apply to irrevocable trusts.

Estate Taxes

Money that you put into a revocable trust is considered your personal asset. Thus, upon your death, all the money that you had deposited into the trust is subject to estate taxes. Your executor must report the contents of the trust as an asset of your estate and pay taxes on it when he settles your estate. Irrevocable trusts are not subject to estate taxes because the money in them is no longer considered your personal asset when you die.

Charitable Donations

If you transfer funds into an irrevocable trust for charitable purposes, you can write off the donation from your taxes in the year that you make it. If you stipulate that funds are to be donated to an irrevocable charitable trust after your death, your estate takes the deduction in the year of your death. Charitable trusts must be irrevocable; revocable trusts cannot be used in this manner.

Income Taxes

If you deposit money into a revocable trust, the money is considered your personal income. It, along with any dividends from investing the trust funds, must be reported on your federal and state income taxes each year. Thus, revocable trusts do not help you avoid taxes. Irrevocable trusts are not subject to income taxes because the money is no longer considered yours when you deposit it in the trust.


Irrevocable trusts have better tax consequences than revocable trusts. However, once you set up an irrevocable trust, it is more difficult to change it. You have to go through the court system to change the trustee, the beneficiaries, or the terms of distribution, and most courts won't agree to a change unless you have a substantial reason for making it, such as having divorced the beneficiary or evidence that the trustee is dishonest.

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