Revocable Living Trust and Capital Gains Tax

In the area of estate planning, setting up a revocable living trust can be an effective way to help your family avoid probate when you pass away. When you put assets that gain value into a revocable living trust, those assets could be subject to capital gains taxes when they are liquidated.

Tax Savings

When setting up a revocable living trust, many people do so with the intention of saving money on taxes. In reality, using a revocable living trust does not save you any money when it comes to paying income taxes or capital gains taxes. For example, if you put stocks into a revocable living trust and then later sell them for a profit, capital gains taxes will still be due on the value of the gain.

Capital Gains Exclusion

Many people who create a revocable living trust place their homes in the trust. By doing this, you do not give up your right to claim a capital gains tax exclusion when you sell your house. When you sell your primary residence, you get to exclude up to $250,000 as an individual or $500,000 as a couple if you have lived in your house for more than two years, as of 2011. Even though the home is in the trust, it is still your primary residence and you still get to take the exemption.

Beneficiary Pay Taxes

If you pass away and the beneficiary of your trust inherits the assets, he may be able to avoid paying capital gains taxes on the assets. When you inherit assets that have appreciated in value, the cost basis of those assets jumps up to the value on the date of the death of the owner. This means that if the assets in the trust are sold immediately after they are inherited, the beneficiary may not have to pay capital gains taxes.

Considerations

If the trust is set up so that it pays out a regular income to a beneficiary, then the beneficiary may have to pay capital gains taxes or income taxes on that income while you are still alive. For example, if the trust is designed to sell some shares of stock each year and give a payment to the beneficiary of the trust, the beneficiary will then have to pay taxes on that money as it is received if the trust does not pay the taxes first.

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