Does a Revocable Trust Have Any Impact on Capital Gains Tax?

trust capital gains tax

Are you a high-income earner looking for a way to reduce your capital gains tax bill? Wondering whether setting up a revocable trust might be the answer to all your problems? 

Capital gains tax can be a huge burden for people who work hard and invest in real estate or stocks. The good news is that there may be a way to reduce the amount of capital gains tax you pay: setting up a trust. But what kind? 

In this article, we’ll explore whether creating a revocable trust will have any impact on your capital gains tax bill and how you can get help. 

A Quick Look at Revocable Trusts

A revocable trust is an important estate planning tool that enables individuals to manage their assets and direct them as they see fit. It allows the grantor, or creator of the trust, to retain control over their property while in effect. 

The grantor can also modify the terms of a revocable trust at any point during its existence. Furthermore, it’s easy to transfer ownership of assets into a revocable trust without paying taxes on those items.

These kinds of trusts are sometimes referred to as ‘living trusts’ due to their ability to be modified or revoked by the grantor before death. They offer a great deal of flexibility concerning how assets are distributed upon death, providing more control than other types of trusts, such as irrevocable ones.

Additionally, these instruments allow you to avoid probate court proceedings, which can be costly and lengthy for settling estates after death. 

Can a Revocable Trust Avoid Capital Gains Tax? 

A revocable trust does not avoid capital gains tax because the trust’s creator still owns the assets held in the trust. This means that any profits or losses generated by the assets in the trust are still taxable to the original owner. 

A revocable trust is a type of trust in which the creator of the trust, also known as the grantor, maintains the right to revoke the trust at any time, and the terms of the trust can be changed at any time. Although a revocable trust may provide some tax and estate planning benefits, it does not avoid capital gains tax.  Further, a revocable trust does not help one for Medicaid planning.    For Medicaid planning, all trusts MUST be irrevocable, which means you no longer have day to day control over the assets in the trust.  However, the terms of the trust are your wishes, so the trust can be created to your preferences, but the ultimate control, once created, is with a trustee.

When assets are held in a revocable trust, the grantor is still legally and financially responsible for the assets, including any gains or losses associated with them. 

Capital gains on the sale of assets held in a revocable trust are still taxable to the grantor and must be reported on the grantor’s income tax return. Any income generated by the trust may also be taxable to the grantor, depending on the type of income and other factors.

Revocable trusts are not a way to avoid capital gains tax. Instead, they are most often used to protect and manage assets during the grantor’s lifetime and to provide direction and control over how assets are distributed after the grantor’s death. 

Considerations for Setting Up a Revocable Trust

When setting up a revocable trust, there are several important considerations.

Benefits of a Revocable Trust:

  • Avoidance of Probate — assets in a revocable trust avoid probate and therefore save time, money, and hassle associated with the probate process
  • Privacy — revocable trusts are private documents, so their assets are not made public
  • Flexibility — revocable trusts are very flexible and can be changed or revoked anytime
  • Control — once assets are transferred to a revocable trust, the original owner still controls them.

Drawbacks of a Revocable Trust:

  • Limited asset protection — revocable trusts are less effective at providing asset protection than irrevocable trusts
  • Tax implications — assets in a revocable trust are subject to income and estate taxes
  • Not permitted for Medicaid planning.

Ultimately, whether or not trust is right for you will depend on your goals and your financial situation. But if you’re looking for tax benefits, you might consider setting up an irrevocable trust instead.

Secure Your Financial Future — Call The Simone Law Firm Today

A revocable trust is a powerful estate planning tool that can be used to help reduce or eliminate capital gains taxes. It can also provide some asset protection during your lifetime and ensure assets are distributed according to the wishes after death.

However, it’s important to understand that setting up a revocable trust doesn’t do much in terms of tax liability. When deciding whether or not to create a revocable trust, it is essential to consider all factors at play, including potential capital gains taxes. 

An experienced estate planning attorney can help analyze an individual’s current financial situation and identify the best options to achieve their estate planning goals without increasing their taxable liabilities. Ultimately, creating a revocable trust should only be done with careful consideration to benefit the beneficiaries in accordance with the creator’s intentions. 

Call the Simone Law Firm to get started on your estate plans today. 

Author Bio

michael s. simone, esq.

Michael Simone is the Founder and Managing Partner of the Simone Law Firm, an estate planning law firm in Cinnaminson, NJ. With more than 20 years of experience in criminal defense, he has represented clients in a wide range of legal matters, including estate planning, elder law, probate, real estate, and business law.

Michael received his Juris Doctor from the Rutgers University School of Law and is a member of the New Jersey Bar Association.

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