How are Revocable Trusts Taxed?

 In Revocable Trusts
revocable trust taxation

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How are revocable trusts taxed?


Revocable trusts, also often called “living” trusts, are taxed to the grantor — the person who created the trust. In most cases, accounts in revocable trusts are held in the Social Security number of the grantor and as far as the IRS is concerned, the trust doesn’t exist. Where the trustee is different from the grantor, technically the trust is supposed to obtain a separate tax identification number (EIN) and use that number both for any bank or investment accounts and to file a separate 1041 tax return. However, for tax purposes the income would still be attributable to the grantor and taxed to him or her whether or not the trust has a separate EIN. For that reason, most revocable trusts simply use the grantor’s Social Security number whether or not she or he is serving as trustee.

Upon the grantor’s death, if the trust is to be distributed and terminated it can still close out operations using the grantor’s Social Security number. However, if the trust continues after the grantor’s death for the benefit of other beneficiaries, at that time it becomes irrevocable and must to obtain its own EIN, inform financial institutions where it holds accounts of the new number, and begin filing 1041 returns.

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