Attorney
Have you heard that trusts provide major tax benefits, but you’re not sure what those tax benefits are? This blog post will shed some light on the difference between revocable and irrevocable trusts for tax purposes to provide a better picture of what tax benefits to expect when drawing up an estate plan.
Revocable Trusts
A revocable trust is a trust established during the grantor’s life. This type of trust, in general, does not provide direct tax benefits during the life of the grantor. This is because the trust income is attributed to the grantor of the trust for tax purposes. As such, the grantor usually uses his or her Social Security Number for income taxation purposes and an EIN (Employer Identification Number) is not required for a revocable trust, except in specific circumstances. One common circumstance is if the grantor of the revocable trust wants to open a bank account in the name of the trust. The EIN is mainly required by financial institutions for administrative purposes related to managing trust assets.
However, after the passing of a grantor of a revocable trust, there may be some tax benefits enjoyed by the beneficiaries of a trust. A revocable trust becomes irrevocable upon the death of the grantor. In this case, if a surviving spouse becomes the beneficiary of a revocable trust’s assets, the surviving spouse may accumulate income (in the form of trust assets) that should be reported for tax purposes.
Although tax benefits are not realized during the grantor’s lifetime when a revocable trust is established, there may be a step-up in basis for certain assets upon the death of the grantor. This provides a tax benefit because the tax burden is minimized on the appreciated value of the asset received by the beneficiary. Thus, this adjustment can reduce capital gains taxes for beneficiaries if and when they sell the inherited asset.
Irrevocable Trusts
An irrevocable trust is another option that you can choose for your estate plan if you no longer wish to have control over those assets that you put into the trust. Certain assets, like medical savings accounts, retirement accounts, cash and vehicles should not go into an irrevocable trust because the grantor signs over the control to the trust upon execution. Under the Florida Trust Code, irrevocable trusts typically cannot be changed once implemented, unless the grantor and beneficiaries unanimously agree to the revocation or modification.
Irrevocable trusts can be beneficial for tax purposes. An irrevocable trust is considered a separate legal entity since the trust is no longer under the power or control of the grantor. This is beneficial because the assets in the irrevocable trust are no longer considered a part of the grantor’s estate and are not subject to estate taxes upon the grantor’s death. Thus, moving assets into an irrevocable trust can protect your assets from an estate tax.
Florida has eliminated its estate tax, so Florida residents would not reap the tax benefits at the state level. However, Florida residents are still subject to the federal estate tax if they fall within the federal government’s estate tax threshold. Effective January 1, 2024, the federal estate and gift tax exemption became $13.61 million per individual, with a combined $27.22 million for a married couple. It is important to note that the increased estate and gift tax exemption is set to sunset at the end of 2025 to approximately $7.5 million per individual, so be cognizant of your estate taxes if this applies to you.
If you would like to consider establishing a trust or have questions about your estate plan, please contact the attorneys at Boatman Ricci to set up a consultation. We can be reached at 239-330-1494.
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