top of page

Tax Planning Time- and Your Estate Plan

"There is nothing certain in life, except for death and taxes." - Benjamin Franklin

It's that time of year when we all start thinking about getting those dreaded taxes done. Whether you owe or get a refund, the tax preparation part isn't the most fun thing we get to do as an adult.

I always think of the movie Stranger Than Fiction and laugh about the scene in which Joan Cusow's character throws Will Ferrel, out of her bakery and shouts, Get Bent Tax Man! and everyone boos him.

Even though they're just doing their job, no one likes taxes or the IRS.

And for clarity here, this is not tax advice or legal advice. I always encourage you to talk with or work directly with a CPA for any tax related questions or planning. This is just education and information for you to think about when working with your CPA or financial advisor.

A big question I get this time of year is "how does having a revocable living trust impact my taxes."

The easy answer- It doesn't!

The effect of a revocable trust on tax liability is interesting. In a revocable trust, the grantor/Trustor/Settlor retains the right to receive the trust's income and principal (because of the power to manage their assets directly through the trust itself- just as you would do with your assets if you didn't have a revocable trust set up).

Any income generated by a revocable trust is taxable to the trust's creator (who is often also referred to as a settlor, trustor, or grantor) during the trust creator's lifetime. This is because the trust's creator retains full control over the terms of the trust and the assets contained within it.

Consequently, the Internal Revenue Service views a revocable trust as a grantor's trust and, therefore, not a separate entity. The income from a revocable trust is not reported separately; instead, it must be reported on the grantor's personal tax return.

So the question always becomes, "Does a trust need to file a tax return?"

A revocable trust is also referred to as a grantor's trust, which is an agreement between two individuals (usually the same person): the property/asset owner and the beneficiary (who is usually the Trustor of the trust). Before the Trustor's death, taxes paid over the assets and their capital gains are made by the Trustor, the same as if they didn't have the trust.

The Internal Revenue Service website, shows that the Trustor has to correctly input the taxes in the Form 1040 if they are the trustee:

The effect of this is that the trust will not exist for tax purposes as long as it remains a Grantor trust.

Upon the death of the Trustor or the Surviving Trustor, the trust changes entirely and becomes an irrevocable trust. The trust changes to an irrevocable trust at the death of the Trustor or the Surviving Trustor in order to preserve the wishes of the Trustor to not allow anyone else to change the wishes for distribution by the Trustor.

Basically, Once the Trustor is dead, their rights over the trust properties are automatically transferred to the beneficiaries.

However, for proper distribution, a trustee specified in the trust documents gets all the powers and rights the Trustor used to possess. This trustee might be one of the beneficiaries. The revocable trust taxes will then be known as irrevocable trust taxes, and these are the kinds of taxes that require the filing of a tax return. The process to be carried out by the specified trustee is generally as follows.

  1. Get an irrevocable trust tax ID number—the federal tax ID, also known as the employer identification number (EIN). You can always get this number for the trust at any time if you wish it to be identified separately from the Social of the Trustor. * A big note on this- an EIN is FREE from the IRS website. Don't let some scammy site charge you. They look super official and then charge a fee at the end. This isn't the right spot - Here is the link: LINK HERE

  1. Ascertain whether or not more than $600 was made within the tax year.

  2. Visit the IRS website to download two forms: Form 1041 for the trustee and Schedule K-1 for the beneficiaries to show amounts distributed to them.

  3. Confirm the Schedule K-1 is the correct one as there are different versions.

  4. Report all earned income to IRS, directly related to the property or not.

  5. Report all profits and losses.

  6. Add all deductions of the owner.

  7. Fill Schedule K-1 and Form 1041; give copies to beneficiaries.

  8. Send it to the IRS.

Whoooo, that is a lot. This is why I always refer and recommend you having a CPA handle this for you. They are the experts and frankly are rock stars, because no one wants to read the tax code.

There is a really great article by Forbes on some helpful tax planning tips for your personal taxes that can help you minimize your tax liability and make the most of your money:

  1. Maximize your deductions: Make sure you take advantage of all the deductions you're eligible for, such as mortgage interest, charitable donations, and business expenses.

  2. Contribute to retirement accounts: Contributions to certain retirement accounts, such as a 401(k) or traditional IRA, may be tax-deductible, which can lower your taxable income.

  3. Consider tax-efficient investments: Some investments, such as municipal bonds, may provide tax-free income, while others, like exchange-traded funds, may be more tax-efficient than others.

  4. Make use of tax credits: Tax credits can reduce your tax liability dollar-for-dollar, so it's important to be aware of the credits you're eligible for and to claim them on your tax return.

  5. Timing: Timing can also be important when it comes to taxes. For example, if you're close to a tax bracket threshold, you may want to delay or accelerate income or deductions to stay in a lower bracket.

  6. Review your estate plan: Reviewing your estate plan can help you identify ways to transfer assets in a tax-efficient manner. - Your CPA and Financial Advisor will always be the experts on this.

  7. Keep good records: Keeping accurate records is essential for tax planning, since you'll need them to claim deductions, credits and to report your income.

It's also important to note that tax laws change from year to year and from country to country, so it is crucial to consult a tax professional for advice on how to best plan for taxes based on your specific situation and jurisdiction.

Good luck friends!

Looking to get started on your Estate Plan?

Make your estate planning journey a little less overwhelming, download our free estate planning workbook to help you answer those tough questions!

You can also take my free estate planning workshop on how to avoid probate through a revocable living trust at

17 views0 comments


bottom of page