Living Trusts and Taxes: What You Need to Know and How to Properly Prepare
If you’re considering creating a living trust to avoid probate, you should understand the tax consequences of these trusts. Read on to learn what you need to know about taxes on living trusts, then contact our Brady-Cobin Law Group to schedule a consultation.
What Is a Living Trust?
A living trust or revocable living trust is a vehicle that enables another person to hold your assets on behalf of your beneficiaries. Because this type of trust is revocable, you can alter its contents after you set it up. In contrast, an irrevocable trust cannot be changed after you sign it.
Living trusts offer many benefits in the estate planning process. People often create living trusts to prevent their assets from going through probate, and to provide creditor protection for their heirs’ inheritances.
When you distribute assets to beneficiaries within a trust, they can receive these assets directly upon your death, bypassing probate altogether. They can also receive the assets much faster than they could in a typical probate process.
Trusts also allow for more control over the distribution of your assets. You can specify that a beneficiary should receive their inheritance at a specific milestone or age rather than immediately after death.
Trusts also offer more privacy than wills. When wills go through probate, they become public record. In contrast, the contents of a trust document are private. Only the trustees and beneficiaries will have access to these legal documents.
How Are Living Trusts Taxed?
Living trusts typically do not impact income taxes. In North Carolina, these trusts are considered a pass-through tax item, meaning you can include them on your taxes rather than filing separately. Your Social Security Number remains associated with the assets in trust instead of having a different tax identification number.
When you create a trust, you can file your taxes like normal and declare the value of the trust alongside your other assets. You should understand that creating a living trust does not hide the assets within your trust from creditors. It also does not impact your Medicaid eligibility.
How Do Trust Taxes Change After You Die?
The tax process for living trusts changes slightly after the grantor dies. At this stage, your successor trustee must register the trust to receive a tax ID and file a separate tax return. However, the requirement of a tax ID do not differ from the requirements of any estate to obtain a tax ID. In other words, the income tax ramifcaiton at death is neither positively or negatively impacted when you have a living trust.
Can a Living Trust Impact Your Estate Tax?
North Carolina does not have estate taxes at the state level, but you may be subject to federal state taxes. The federal government taxes estates worth more than $12.92 million for singles and $25.84 million for couples.
How Can Our Attorneys Assist You?
Navigating living trusts and taxes can be complicated. Unfortunately, failing to pay the appropriate taxes with your living trust can lead to IRS penalties. Your beneficiaries or trustees may be subject to financial penalties after your death if you do not navigate tax processes correctly.
When you work with a qualified estate attorney, you can feel confident that you are handling the trust process correctly.
Contact an Experienced Estate Planning Attorney
If you need help navigating living trusts and taxes, we can help. Contact our Brady-Cobin Law Group today at 919-782-3500 for assistance.