There are two primary types of trusts — revocable living trusts and irrevocable trusts — and each one comes with different tax consequences.
A revocable living trust, also known simply as a living trust, is by far the most commonly used form of trust in estate planning. And as long as you are living, there is absolutely no tax impact of creating a living trust.
A living trust uses your Social Security Number as its tax identifier, and this type of trust is not a separate entity from you for tax purposes.
In the case of a revocable living trust, the reason there are no tax consequences is because you can revoke the trust agreement or take the assets back from the trustee at any time, for any reason.
The revocable living trust becomes irrevocable if you become incapacitated or when you die.
An irrevocable trust is created when you make a gift to a trustee to hold assets for the benefit of the beneficiary, and you cannot take back the gift you've made to that individual.
When you create an irrevocable trust, either during your lifetime, or at death through a testamentary trust (a trust that arises at the time of your death through your will), or through a revocable living trust created during your lifetime, the trust is a separate tax-paying entity, and it is either subject to income tax on the earnings of the trust at the rates of the trust or at the rates of the beneficiaries.
Irrevocable trusts also come with tax consequences. As of 2022, the income earned by an irrevocable trust is taxed at the highest individual tax bracket of 37% as soon as the undistributed taxable income reaches more than $13,450. To avoid this high tax rate, in some cases, an irrevocable trust can be prepared so that the tax consequences pass through to the beneficiary and are taxed at his or her rates, which are typically much lower.
Read More
By: Balamuth Law
Title: Trusts & Taxes: What You Need To Know
Sourced From: www.youtube.com/watch?v=7Vv8wpnwkTQ
-------------------------------
