How are Revocable Living Trusts Taxed in North Carolina?

A common question we hear is, "How are revocable living trusts taxed?"

Creating a revocable living trust can be a smart way to plan for the future, but it is important to understand how it may affect your estate and taxes. In this article, we explain what a revocable living trust is and review its potential tax implications and benefits in North Carolina.

What is a Living Trust?

Creating a revocable living trust is not something most people should handle on their own. With tax rules and estate planning considerations always evolving, it is important to understand how to protect your assets and structure your plan properly.

Anyone may establish a revocable living trust for themselves, and married couples may establish a joint trust.   After you establish your trust, you may move assets into the trust. Those assets may include real estate, bank accounts, investment accounts, bonds, stocks, jewelry, and other valuables.  Importantly, the trust may also be the death beneficiary of life insurance, retirement accounts, and other assets. Usually, the person creating the trust also serves as the initial trustee and names a successor trustee to step in if they become incapacitated or dies.

Revocable Living Trusts usually serve as a property succession plan and can often help to avoid the probate process after death. 

Here are several important benefits of creating a revocable living trust:

1.  You may amend, revise, or revoke a revocable trust during your lifetime without going through the court system.

2.  You continue to control the assets in the trust and may transfer property in or out of it as needed.

3.  The trust is a private document and not a public record. You get to decide when and if to share it with anyone else. As grantor, you generally continue to receive the trust’s income and principal during your lifetime.

How Are Revocable Living Trusts Taxed?

Income Tax

In most cases, creating a revocable living trust does not significantly change how your income taxes are handled. In North Carolina, a revocable living trust is generally treated as a pass-through arrangement for tax purposes. That means the trust’s income is typically reported on your personal tax return rather than on a separate return for the trust while you are alive. The trust usually uses your Social Security number instead of its own separate tax identification number, so you would generally continue filing your taxes in the same manner as before.

Estate Tax

North Carolina does not impose a state estate tax or inheritance tax. However, individuals or couples with very large estates (over $15 Million) may still need to consider and plan for federal estate tax.

An experienced estate planning attorney can help you decide whether a revocable living trust makes sense for you and your family, and help you understand any tax issues that may arise during your lifetime or after your beneficiaries inherit trust assets. 

What Happens to a Revocable Living Trust After Death?

After the death of the individual or the couple who made the revocable living trust, the trust becomes irrevocable and its own taxable entity. The trustee will often need to obtain a tax identification number and file any required tax filings for the trust.  If the trust generates income, it will be necessary to consider the timing of distributions to beneficiaries in order to minimize the tax burden. It will be important for the trustee and beneficiaries to consult with tax professionals to plan distributions and also to ensure proper tax filings. 

Tax Advantages and Benefits of Including a Revocable Living Trust in Your Estate Plan

Well, in the past, trusts were mostly used for tax planning because of the large federal exemption. Most families do not need it for tax planning.  Most families decide to use a trust because it helps avoid probate court and makes inheritance easier, faster, and less stressful. 

Speak with a North Carolina Estate Planning Attorney

At Next Stage Legal, we help individuals and families with estate planning strategies designed to protect what matters most. While a revocable living trust may not change your taxes during your lifetime, it has many other advantages, especially for homeowners and families with minor children.

If you have questions about whether a revocable living trust is right for you, Next Stage Legal can help you evaluate your options and build an estate plan tailored to your goals.

Ready to get your estate plan in place? Contact Lee at Next Stage Legal at (984) 355-9747, or click HERE to schedule a free attorney consultation about wills, trusts, probate avoidance, and protecting your family in Chapel Hill, Carrboro, Durham, Cary, Pittsboro, and beyond.