Is the Dissolution of a Revocable Trust a Taxable Event?
Question:
I have a revocable trust that I’m planning to dissolve, disbursing the funds to myself and wife as we decide. In past distributions, capital gains, dividends, interest have passed through to us and we have paid taxes as due. My question is would a pro rata transfer of funds to us individually in our separate brokerage accounts be taxable?
Response:
No. For tax purposes, you are already the owner of the revocable trust assets so any disbursement to yourself is ignored by the Internal Revenue Service. No doubt the accounts were already registered under your Social Security number because, unlike irrevocable trusts, revocable trusts do not require a separate tax identification number. Further, to the extent you transfer the funds to an account in your spouse’s name registered under their Social Security number, there’s still no tax effect because there’s no gift taxes for transfers between spouses (assuming your spouse is a U.S. citizen).
But why do you want to dissolve your trust? Revocable trusts provide many benefits, including probate avoidance and financial management in the event of incapacity. You appear to have already gone to the trouble of creating the trust and retitling your assets in the name of the trust. It seems a shame for those efforts to be set aside.
Don’t know how your trust works?
Whether you’re creating a plan, managing a trust, or are a beneficiary of a trust, this book is your easy-to-read roadmap.