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Posted on Thursday, November 3rd, 2016 by Peter Klenk

From Our “Ask a Question” mailbag:  “After being diagnosed with early-stage Alzheimer’s, I have been thinking about forming a Revocable Trust.  Who pays the income tax on a Revocable Trust?”

Who pays income tax on a Trust

A Revocable Living Trust can be a reliable tool in helping you manage your assets while suffering from Alzheimer’s. But, you should plan carefully and implement checks and balances.

Revocable Living Trusts Can Help Those With Alzheimer’s Safely Manage Their Assets.

A Revocable Trust is a trust that can be “revoked.”  This way you can place assets into the trust where a “Trustee” manages them, but you can always take the property back.  The Revocable Trust is set up with you being the beneficiary.  So, even though the trust owns the assets, these assets can only be used for your benefit. Because you can revoke the trust and you are the beneficiary, Revocable Trusts are “Grantor Trusts.”  The Grantor is the person who creates the Trust.  The Grantor recognizes all income from a Grantor Trust.  Therefore, if you form a Revocable Living Trust you pay any income taxes due from trust assets.

For example, let’s say that you put your checking account and stock account into the Revocable Trust.  The Trustee will open a new checking and a new investment account using the trust’s name, but using your social security number. Your social security number reports all interest and dividends, and you pay taxes due on income as if you owned the assets under your name.

Who Pays the Income Tax on a Revocable Trust? You!

When using a Revocable Trust to plan ahead for Alzheimer’s, consider these ideas.  First, you can name a trusted person as your co-trustee given the right to act independently.  This way you can currently manage your assets but, as your condition worsens, your co-trustee can seamlessly take over.  Second, appoint a Protector.  The Protector is a person (or persons) who can watch over your co-trustee and remove and replace them.  This check-and-balance helps ensure your assets are safe and that you are receiving the proper care.

We regularly draft Revocable Trusts as part of planning for Alzheimer’s.  I would be happy to talk to you about your particular situation.

Contact our office for a free consultation if you have further questions about Revocable Trusts or any other Estate Planning issues.

Wills, Trusts, Probate, and Estate Litigation it’s all we do!

Peter Klenk, Esq.

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