The Disadvantage of a Revocable Living Trust
Complexity: Managing a trust requires ongoing paperwork and record-keeping, which can be burdensome and time-consuming.
No tax advantages: A revocable living trust does not provide any tax advantages over a will, and the grantor may still be subject to estate taxes upon their death.
Irrevocable Trusts
Using an irrevocable trust allows you to minimize estate tax, protect assets from creditors and provide for family members who are under 18 years old, financially dependent, or who may have special needs.
Can a Revocable Trust Avoid Capital Gains Tax? A revocable trust does not avoid capital gains tax because the trust's creator still owns the assets held in the trust. This means that any profits or losses generated by the assets in the trust are still taxable to the original owner.
A revocable trust provides benefits during your life as well, such as continuity in the event you become incapacitated. Assets in revocable trusts also avoid probate, enabling you to avoid the public disclosure, time and fees associated with it.
No, California does not have a state inheritance tax.
A Living Trust can help avoid or reduce estate taxes, gift taxes and income taxes, too.
Rich people frequently place their homes and other financial assets in trusts to reduce taxes and give their wealth to their beneficiaries. They may also do this to protect their property from divorce proceedings and frivolous lawsuits.
Selecting the wrong trustee is easily the biggest blunder parents can make when setting up a trust fund. As estate planning attorneys, we've seen first-hand how this critical error undermines so many parents' good intentions.
A: Property that cannot be held in a trust includes Social Security benefits, health savings and medical savings accounts, and cash. Other types of property that should not go into a trust are individual retirement accounts or 401(k)s, life insurance policies, certain types of bank accounts, and motor vehicles.
Upon the death of the grantor, grantor trust status terminates, and all pre-death trust activity must be reported on the grantor's final income tax return. As mentioned earlier, the once-revocable grantor trust will now be considered a separate taxpayer, with its own income tax reporting responsibility.
An irrevocable trust transfers asset ownership from the original owner to the trust, with assets eventually distributed to the beneficiaries. Because those assets don't legally belong to the person who set up the trust, they aren't subject to estate or inheritance taxes when that person passes away.
Orman was quick to defend living revocable trusts in her response to the caller. “There is no downside of having a living revocable trust. There are many, many upsides to it,” she said. “You say you have a power of attorney that allows your beneficiaries, if you become incapacitated, to buy or sell real estate.
A living trust, unlike a will, can keep your assets out of probate proceedings. A trustor names a trustee to manage the assets of the trust indefinitely. Wills name an executor to manage the assets of the probate estate only until probate closes.
Trusts offer amazing benefits, but they also come with potential downsides like loss of control, limited access to assets, costs, and recordkeeping difficulties.
Parents and other family members who want to pass on assets during their lifetimes may be tempted to gift the assets. Although setting up an irrevocable trust lacks the simplicity of giving a gift, it may be a better way to preserve assets for the future.
It can be advantageous to put most or all of your bank accounts into your trust, especially if you want to streamline estate administration, maintain privacy, and ensure assets are distributed according to your wishes.
Once your home is in the trust, it's no longer considered part of your personal assets, thereby protecting it from being used to pay for nursing home care. However, this must be done in compliance with Medicaid's look-back period, typically 5 years before applying for Medicaid benefits.
The trust fund loophole refers to the “stepped-up basis rule” in U.S. tax law. The rule is a tax exemption that lets you use a trust to transfer appreciated assets to the trust's beneficiaries without paying the capital gains tax. Your “basis” in an asset is the price you paid for the asset.
Another key difference: While there is no federal inheritance tax, there is a federal estate tax. The federal estate tax generally applies to assets over $13.61 million in 2024 and $13.99 million in 2025, and the federal estate tax rate ranges from 18% to 40%.
The beneficiary doesn't owe tax if the funds are considered part of the trust's principal because the funds are considered a return of money that was already taxed before it went into the trust.
Beneficiary Notifications: California law requires the trustee to notify all trust beneficiaries and heirs within 60 days of the grantor's death. Settling Debts and Taxes: The trustee handles paying off any remaining debts, taxes, and expenses associated with the trust.
Revocable Trusts
Typically during the creator's lifetime, the taxpayer identification number of the trust will be the creator's Social Security number. All items of income, deduction and credit will be reported on the creator's personal income tax return, and no return will be filed for the trust itself.
Are distributions from a trust taxable to the recipient in California? Generally speaking, distributions from trusts are considered income and, therefore, may be subject to taxation depending on the type of trust and its purpose.