Does A Living Trust Have To File A Tax Return

Does a living trust have to file a tax return? So we're going to talk about a living trust and a regular trust and for tax purposes, what are the differences? Then we're going to break it down between a revocable and irrevocable trust and how do they file? We're going to add in some conversation about gifting and how do you add that? And it actually takes away from the death benefit at the end, which is why whenever you're designing a legacy, right? A full legacy, including a trust that has a will, has powers of attorney, has a pour over will, has every amendment and every breakdown in it has to have at least what I call the power of five. So it's not just an estate lawyer that's going to do this for you. Estate lawyers is one who actually does the final documents, but there's a compliance team. There's me that's going to walk you through the advocacy of how do you actually put a trust together? What's the difference between the living trust? What do you put in that person? What do you put in the revocable trust? How do you look at islet trust? So whenever you're looking at a trust and actually putting a legacy together, you want the estate lawyer, you want a tax strategist, you want the insurance team, you want the corporate compliance and corporate structure team and me. So you've got to have a whole team of five to put this plan together so you actually can create a legacy that lasts beyond 2.3 generations, which is what the norm is for most people and their legacy, right? Most trusts and most estates break up after 2.3 years because of the lack of coordination and lack of actually strategic planning. And then I also want to talk about, does the living trust have to file tax and when? And so we're going to actually get through that because yes, you do have to file. So let's get to some of the definitions that are absolutely imperative, I think, for you to understand. First of all, revocable and irrevocable. Revocable, you are the beneficiary. You actually can sign, you can be very active in that trust. Irrevocable means it's completely away from you. You have to have a trustee in between you and the transactions. So it's on behalf of whoever the beneficiaries are. A lot of times they might be your children, charity, something like that. But you can't just make decisions and sign checkbook authority of irrevocable trust. What is a living trust and why it matters? It's a legal entity that holds your assets while you're alive, distributes to them according to your wishes when you pass. It does indeed need to file a tax return. So let's talk about the revocable and irrevocable in two different sets of terms. I'm actually going to like reading some like legal definitions. So the revocable living trust with no separate tax return required because it's part of you, right? It's a living trust with your lifetime of which you then can give as a beneficiary to whoever you so choose. It means that you, the grantor, the creator of the trust has full control over all assets for tax purposes. The IRS treats this as the trust doesn't exist separately from you. So it just files with you. The income from the trust is reported on your personal tax return, your 1040. No separate tax return is required as long as the grantor, the creator of the trust is alive. When you pass, the trust may become irrevocable or have other tax obligations. Now different. Let's go into the details of an irrevocable living trust. A separate tax return is required. And again, a trustee stands and revocable trust is treated as a separate legal entity for tax purposes. It must file its own taxes at 1041 and must be subject to trust tax rates. So not your personal rates, your trust tax rates, depending on the amount of assets inside of it. The trust must attain its own EIN, employer identification number from the IRS. Trust income is taxed separately unless it's distributed to the beneficiaries. If the income is distributed, the beneficiaries have to report it on their personal tax returns, or if it's allocated to another trust, it has to go through that process, depending on where the money lands. Again, you always got to follow the money trail and where the money's wired. An irrevocable trust can provide tax benefits and asset protection, but it limits your control over the assets. So you have to have a trustee as part of the facilitator of the movement of assets. So it's up to you. I have both. I have multiple. I also have ILS, which are designated towards this life insurance trust for my children and for me. So how a living trust protects you is it actually makes sure that you don't land in probate. So upon anyone's passing anywhere in the world, you end up going to probate with the country or the state province that you live in. So if you're assigned a probate attorney, then they're going to take a fee. A lot of times that's 20, 30, 40, sometimes 50 percent. The average is 40 to 50 percent of your estate will be actually taken away in fees, not only to the probate attorney, but to the state and just the taxes alone because you weren't set up properly. The other thing that a trust does, it provides privacy. So I don't ever put the trust in my name or our family's name. It's just some random name and it's not recorded anywhere. So it's just a private document between you and your lawyer, your facilitators. And upon your passing, then they can read through the trust, the will. And here's the difference between it. The trust keeps you out of probate. The will is the stuff, right? Like who gets the jewelry? Who gets the cars? Who gets the art? Who gets the furniture? Who gets the stuff? You could actually have that all designated before you pass, which is highly, highly, highly encouraged because if you don't, you're going to end up in a war. I don't know how many families have what I call the surprise basket. They have five, six kids, three kids, four kids, not educated. And upon their passing, no one knows who's getting what. Nobody knows what the bank accounts are. No one knows what the files are. See, in this book, and if you want to go grab this entire Gen W worksheet and workbook, it comes with a three-day course and then two years of consistent updates. And it walks you through from the first page. It says, I'm dead. Now what? Contact these people. And it just starts a whole journal of what do you need to do upon someone's passing. So you can either have it all laid out, very scripted, almost like a blueprint upon your passing, right? What bank account information? What are your assets? What are your crypto wallets? What are your current liabilities? Where do you find all these documents? Like all of this is completely laid out. Social media. What do you do with your websites? All of this stuff has to be considered upon someone's passing. And obviously the larger the life you've built for yourself, the more work it is for the heirs to actually have to take care of it. So I highly encourage you to help manage all of this and have it organized. So upon your passing, it's fairly easy. Things that you want to keep alive and moving ahead and continue bank accounts, continue cash flow. They get to stay in order and you aren't disrupted. Many times the family is so disrupted upon a passing because they're not that organized. For many estates, having an irrevocable trust provides you the highest asset protection. In fact, there are Nevada asset protection trusts that after your assets have been held in there for two years, pretty much that's what we call bulletproof. Whether you really bulletproof, they actually make them non-litigatable. They're not even part of it because they're not part of you. They're irrevocable and some other trustee is holding them. So it's high privacy, high asset protection and liability protection against creditors. So before I continue on and wrap up this trust conversation, which I love and I think is vital, that you seriously consider a legacy. And those of you that are inheriting one, get your families involved. Those of you who are giving a bunch of money to a bunch of uneducated kids, get those kids involved. Why would you do all this just so you could have a great life and then let it all fall down and break up? I literally bet families up to 34 years living through probate, hell. I mean, it is absolutely the worst because no one can move the assets. The cash flow is not moving. Even if the asset appreciated, no one can really sell it. You can't do much because it's frozen in probate court. So don't be those people. Get clear on what you want. So I need you to subscribe to my channel. I need you here five days a week. I have huge playlists where you can go and look for search terms. 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At any time, go to asklaurel.com, ask a question, make a request. It's A-S-K-L-O-R-E-L. And we're there 24 seven. The last point I want to make is when does the living trust have to file a tax return? While the grantor is alive and the trust is revocable, which means that going directly to you, no separate return is required. So it just files with you. Now, if you've actually done some gifting, you need to put that as part of your strategy. Sometimes you do file a gifting return. Sometimes you just track it and then it's deducted off at the end on your death benefit. If the trust becomes irrevocable because the grantor has passed away, then a tax return at 1041 has to be filed. So again, a lot of this is who do you use for your tax strategy? Who do you use for your trust? Our goal is to integrate. These team members have to work together. There should be five to six people on the team of your legacy, not one, not just an estate lawyer. So again, if you have any questions, want our help, want our facilitation, our guidance, go to asklaurel.com, ask a question, make a request, say, Hey, I want to really talk this through tomorrow. In fact, I'm actually having a meeting with the client who is putting together a prenuptial, which then will roll right into the trust. So the prenuptial is going to be a piece that will roll into a revocable and irrevocable trust. So we know to help guide, navigate and get it done right. So stay in touch with us and we'd love to have you on our team. Talk to you tomorrow.