Do You Pay Taxes on a Living Trust?

A living trust is a legal arrangement established during an individual’s lifetime to hold and manage assets. Its primary purpose is to facilitate the orderly transfer of assets to beneficiaries outside of the probate process, which is the court-supervised procedure for validating a will and distributing a deceased person’s estate. A living trust can also provide for the management of assets if the grantor becomes incapacitated. Assets placed into a living trust are managed by a trustee, who can be the grantor themselves, and then by a successor trustee after the grantor’s death. This structure helps ensure privacy and continuity in asset management and distribution.

Tax Implications During Your Lifetime

When a revocable living trust is established, its tax treatment during the grantor’s lifetime is straightforward. For income tax purposes, a revocable living trust is considered a “grantor trust” under Internal Revenue Service (IRS) rules. This designation means that the trust is not treated as a separate taxable entity. Instead, all income, deductions, and credits generated by the assets held within the trust are reported directly on the grantor’s personal income tax return, Form 1040, using their Social Security Number. The trust itself does not need to file a separate income tax return, Form 1041.

Transferring assets into a revocable living trust does not trigger gift tax consequences. This is because the grantor retains complete control over the assets and can modify or revoke the trust at any time.

Regarding property taxes, transferring real estate into a revocable living trust does not result in a reassessment of the property’s value. The beneficial ownership of the property has not fundamentally changed, as the grantor still controls the asset. Property taxes continue to be paid as they were before the transfer, based on the existing assessed value.

Tax Implications After Death

After the grantor’s death, a revocable living trust becomes irrevocable, and the tax implications change significantly. Assets held in the trust are included in the deceased grantor’s gross estate for federal estate tax purposes. This inclusion is because the grantor maintained control over the assets during their lifetime. For 2025, the federal estate tax exemption amount is $13.99 million for individuals, meaning estates valued below this threshold do not owe federal estate tax. For married couples, this exemption is effectively doubled to $27.98 million.

A significant tax benefit that may apply after death is the “step-up in basis” rule. Assets inherited through a living trust receive a new cost basis equal to their fair market value on the date of the grantor’s death. This adjustment can substantially reduce potential capital gains tax for beneficiaries if they later sell appreciated assets, as the capital gain is calculated from this stepped-up value rather than the grantor’s original purchase price.

Upon the grantor’s death, the trust transitions from a grantor trust to a separate taxable entity. If the trust generates income or holds assets for a period before distribution, it may be required to file its own income tax return, Form 1041. The trust’s income may be taxed to the trust itself or to the beneficiaries, depending on whether the income is retained by the trust or distributed to the beneficiaries.

Trust Tax Identification Numbers

During the grantor’s lifetime, a revocable living trust does not need its own Employer Identification Number (EIN). For tax reporting purposes, the trust uses the grantor’s Social Security Number (SSN), as the IRS views the trust as an extension of the grantor.

An EIN becomes necessary for a living trust primarily after the grantor’s death. Once the trust becomes irrevocable and acts as a separate taxable entity, it requires an EIN to manage its assets, file its own income tax returns (Form 1041), or distribute income to beneficiaries. This is because the grantor’s SSN is no longer valid for the trust’s tax identification. An EIN might also be needed during the grantor’s lifetime if the trust operates a business or becomes irrevocable for other reasons.

An EIN is obtained from the IRS. The application process can be completed online through the IRS website, or by submitting Form SS-4 via fax or mail. This unique nine-digit number identifies the trust for tax purposes.