Since a revocable trust allows you to revoke your assets from the trust, the IRS considers assets placed into this type of trust to still be owned by the taxpayer.
If you owe money, any assets that you hold in a revocable trust will be considered part of your net worth. Creditors can seize these assets through collections actions. And courts can order you to pay debts based on what's in the trust. They are even considered part of your total assets during a bankruptcy proceeding.
Revocable trusts are the simplest of all trust arrangements from an income tax standpoint. 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.
There is no statute of limitations on an IRS audit and a California tax audit in cases involving civil or criminal tax fraud.
The IRS has a limited window to collect unpaid taxes — which is generally 10 years from the date the tax debt was assessed. If the IRS cannot collect the full amount within this period, the remaining balance is forgiven. This is known as the "collection statute expiration date" (CSED).
If you are putting your assets in a revocable trust, the IRS could go after your assets in the trust. However, if you are putting the assets in an Irrevocable trust, the IRS generally cannot go after your money.
The Disadvantage of a Revocable Living Trust
Complexity: Managing a trust requires ongoing paperwork and record-keeping, which can be burdensome and time-consuming.
With the new IRS rule, assets in an irrevocable trust are not part of the owner's taxable estate at their death and are not eligible for the fair market valuation when transferred to an heir. The 2023-2 rule doesn't give an heir the higher cost basis or fair market value of the inherited asset.
That means your own Social Security number will be used for the trust's bank accounts and investments. It also means that as long as you live, all of that income should be reported in your personal tax return. You won't need to file a separate federal tax return for the trust.
Revocable Trusts
Say, for example, that they place their house in a trust, they can then sell the property or remove it from the trust at any time. For these trusts, the assets within them remain part of the grantor's taxable estate, meaning it receives no creditor protection. However, they do avoid probate.
An irrevocable trust offers your assets the most protection from creditors and lawsuits. Assets in an irrevocable trust aren't considered personal property. This means they're not included when the IRS values your estate to determine if taxes are owed.
A revocable living trust is a type of trust that you can change or revoke at any time. Because you still own the assets in a revocable living trust, creditors and lawsuit plaintiffs can still come after them. Irrevocable living trusts, on the other hand, can offer more protection from creditors and lawsuits.
If a house is in a revocable trust, you don't need anyone's permission to sell the property because you can freely move assets in and out of the trust until you die. Because you can just take the property out of the trust to sell it, there are no special considerations, so you pay taxes as if the trust did not exist.
A Living Trust can help avoid or reduce estate taxes, gift taxes and income taxes, too.
The IRS and Irrevocable Trusts
When you put your assets into an irrevocable trust, they no longer belong to you, the taxpayer (this is different from a revocable trust, where they do still belong to you). This means that generally, the IRS cannot touch your assets in an irrevocable trust.
No, once you transfer assets into an irrevocable trust, they are no longer considered your property for tax purposes and are generally protected from IRS seizure.
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.
How do I dissolve a revocable trust in California? Dissolving – or “revoking” – a revocable trust follows a similar process to that of amending it. You'll need to transfer all the property and all the assets in the trust back to your name and then complete a trust revocation declaration statement.
A revocable trust can be changed at any time. An irrevocable trust is much more difficult to change after it's been set up, but it also comes with some tax and asset-protection advantages.
What Accounts Can the IRS Not Touch? Any bank accounts that are under the taxpayer's name can be levied by the IRS. This includes institutional accounts, corporate and business accounts, and individual accounts. Accounts that are not under the taxpayer's name cannot be used by the IRS in a levy.
If you are the beneficiary of a life insurance policy and you owe the IRS, the IRS can seize those proceeds. Additionally, if you have a life insurance policy with no beneficiary named and you owe the IRS, the IRS can seize the policy funds before they are distributed to your next of kin.