Bay Area Estate And Tax Planning Law Firm

Living trusts and tax returns: What you need to know

On Behalf of | Jul 28, 2023 | Estate Planning |

Estate planning in California is critical to preparing for your future and protecting your assets. Understanding the different types of trusts available to you and how they may affect your tax return can help you make informed decisions about estate planning.

Living trusts: What they are

A living trust is an estate planning tool used to manage the distribution of a person’s assets after death. Living trusts differ from wills because they do not pass through probate court. This makes them popular for those looking to avoid lengthy and costly probate proceedings. The main advantage of using a living trust is that it can help maintain control over your assets while you are still alive.

Tax filing requirements for living trusts

When filing taxes, living trusts are treated like any other trust. A trust exceeding $600 of gross income during the tax year, or one with a non-resident alien as a beneficiary, must file a federal return using Form 1041. This form reports the trust’s income to the Internal Revenue Service (IRS).

While most trusts must meet this filing requirement regardless of their income level, certain exceptions may apply. For example, if the trust is a grantor trust, the income must be reported on the grantor’s personal 1040 return.

A revocable marital trust in which both spouses live may also be exempt from filing requirements. In this case, the income from the trust’s assets should be reported on the spouses’ returns, and the trust does not need to file Form 1041.

However, if one spouse dies while the revocable living trust is in effect, the portion of their assets becomes irrevocable and must be reported on Form 1041. The trust will then be required to file an income tax return each year, subject to specific income level requirements.

Understanding the filing requirements associated with living trusts can help you make informed decisions about estate planning that best protect your assets now and in the future. Knowing these details will also help ensure your trust complies with federal and state tax regulations.