Revocable Trust TaxesRevocable Trust Taxes

Revocable trust taxes come into play after all parties that created the trust are deceased. Typically, during the lifetime of the grantors, there is not any special tax consideration. In this article, we will briefly go over revocable trust taxes and beneficiary taxation.

Interest and Principal

A trust fund is broken into two different categories: principal and interest. Principal refers to any assets placed into the trust before the grantors pass. Usually, the distribution of the principal is not taxed because the assets were taxed before they were placed into the trust.

On the other hand, interest refers to the growth in the value of principal assets. Interest is taxable to the trust and/or the beneficiaries as income.

Who Pays Taxes

If a trust does not distribute interest earned during the tax year it is responsible for paying income tax. The trust will only need to pay tax on any undistributed income. Income distributed to the beneficiaries is not taxable to the trust. Instead, each beneficiary who received an interest distribution will be responsible for paying the taxes on their portion.

Estate Tax Forms

A trust files its annual tax return using a form 1041. This form calculates which portion of interest is taxable to the trust as income. The trust is able to deduct from its total income any interest paid out to beneficiaries.

The trust will also need to prepare K-1s for all of the beneficiaries. A K-1 lets a beneficiary know their tax liability. It reports the total amount of principal and interest given to the beneficiary during the year. The beneficiary uses this form when filing their taxes to help calculate any amount they may own relating to their trust distributions.

Filing Revocable Trust Taxes

Filing revocable trust taxes is very complex. If you find yourself in a situation where you need to file it is wise to utilize an experienced tax preparer to avoid errors.

Questions? Want to schedule an appointment? Contact us by clicking here.