Who Pays Taxes on a Revocable Trust?

A revocable living trust allows an individual (the grantor) to place assets into the trust while retaining full control. The grantor can modify or dissolve the trust at any time. For tax purposes, the grantor remains responsible for paying taxes on any income generated by the trust’s assets during their lifetime.

Tax Responsibility During the Grantor’s Lifetime

During the grantor’s lifetime, a revocable trust is generally considered a “grantor trust” under the Internal Revenue Code. If the grantor retains powers like the ability to revoke the trust, they are treated as the owner of the trust’s assets for income tax purposes. All income, deductions, and credits generated by the trust’s assets flow directly to the grantor’s personal income tax return.

The grantor reports all trust income, such as interest or capital gains, on their individual Form 1040. The trust itself typically does not need a separate Employer Identification Number (EIN) or file a Form 1041 during this period. The grantor uses their Social Security Number (SSN) for all reporting related to the trust’s income.

Tax Responsibility After the Grantor’s Death

Upon the grantor’s death, a revocable trust typically becomes an irrevocable trust. This means the trust is no longer under the grantor’s control. At this point, the trust becomes a distinct legal and tax entity, separate from the deceased grantor’s identity.

The now-irrevocable trust is responsible for its own income tax obligations. The trustee must obtain an Employer Identification Number (EIN) from the Internal Revenue Service for the trust, which serves as its unique tax identification. The trust is then required to file an annual income tax return, Form 1041, reporting any income it earns after the grantor’s death, as well as any deductions and distributions made. Income retained within the trust is subject to trust income tax rates, which can be compressed and reach the highest marginal rates at relatively low income thresholds.

If the trust distributes income to its beneficiaries, that income is generally taxable to the beneficiaries rather than the trust. While a revocable trust helps assets avoid the probate process, its assets are usually included in the grantor’s gross estate for federal estate tax purposes. However, the primary focus for the trust itself after death shifts to managing and reporting its ongoing income for income tax purposes.

Key Tax Forms and Identification Numbers

During the grantor’s lifetime, the tax reporting for a revocable trust is straightforward, as the grantor is considered the owner of the trust’s assets for tax purposes. The grantor uses their personal Social Security Number (SSN) for all tax reporting related to the trust’s income. All income, deductions, and credits are reported directly on the grantor’s individual income tax return, Form 1040.

After the grantor’s death, when the revocable trust becomes irrevocable, its tax identity changes significantly. The trustee must apply for and obtain a new Employer Identification Number (EIN) from the IRS for the trust. This EIN is essential for the trust to operate as a separate tax entity.

The trustee is then responsible for filing Form 1041, U.S. Income Tax Return for Estates and Trusts, annually for the trust. This form reports the trust’s income, deductions, gains, and losses. If the trust distributes income to its beneficiaries, the trustee will issue a Schedule K-1, Beneficiary’s Share of Income, Deductions, Credits, etc., to each beneficiary. Beneficiaries then use the information from the Schedule K-1 to report their share of the trust’s income on their own personal Form 1040.