Tax Filing for a Revocable Trust

by Phil M. Fowler

The Internal Revenue Service (IRS) refers to revocable trusts as "grantor trusts." The IRS rules dictate that a grantor trust, or a revocable trust, is merely an extension of the grantor. This means that any property owned by the trust, or income produced by the trust, is the property or income of the grantor. The grantor trust rule plays an important role in the taxation consequences of transferring property to the trust, earning income on the trust property, and distributing property from the trust.

No Transfer

According to the IRS, when a taxpayer transfers property to his revocable trust, no taxable transaction occurs. Therefore, there is no need for the taxpayer to file any tax paperwork on the conveyance transaction. This is different than if the taxpayer creates and transfers property to an irrevocable trust. In that case, the taxpayer would need to file either a gift tax return for a capital gains tax return. However, neither of those tax returns apply in the revocable trust situation.

Distributions

A distribution from a revocable trust can require the filing of tax paperwork. The beneficiary who receives a distribution of trust assets may need to file a state inheritance tax return. Not every state imposes an inheritance tax, however, so the beneficiary will need to check with the tax department in his state. Additionally, if the distribution is a gift then the trust grantor may have to file a gift tax return with the IRS.

Estate Tax

As long as the grantor who created the revocable trust remains alive, the trust does not require any type of estate tax filings with the IRS. However, if the grantor passes away at a time when, the total value of the trust is more than $5,000,000, as of the time of publication, then the trustee will need to file an estate tax return with the IRS. The estate tax is a tax paid to the IRS on any gifts of more than $5,000,000.

Annual Tax Return

A revocable trust does not require filing a separate annual tax return. Instead, the grantor of the revocable trust simply includes the trust income on the grantor's personal income tax return. The income earned by the trust is simply income earned by the grantor. The grantor reports the trust income on Schedule E to IRS Form 1040.

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