When I was younger, my grandparents got a visit from an attorney telling them about the importance of a revocable living trust and how it was essential that they have one of these trusts to protect their assets and save them taxes. Unfortunately, both of these claims are untrue. For some basics on Texas revocable living trusts and a discussion of the asset protection misconception, see my previous post concerning revocable trusts and asset protection. Myth #2 is that a Texas revocable living trust will save you taxes.
There are two types of taxes that are discussed here. The first is the federal estate tax. In 2014, each person has a federal estate tax exemption amount of $5.34 million, meaning a married couple can have an estate worth $10.68 million before any federal estate tax would be owed. This number is indexed for inflation and increases each year. For most people (over 99% by some estimates), estate tax will never be a concern. And for those people who will have taxable estates, the same type of tax planning that is often done in revocable living trusts can be done in a last will and testament. So, from an estate tax perspective, the revocable living trust offers no real benefit in terms of tax savings.
The second type of tax that some people believe can be saved by having a Texas revocable living trust is income tax. For federal income tax purposes, assets owned by a revocable living trust are treated as being owned by the grantor (the person who placed the assets in the trust). In tax parlance, this type of trust is referred to as a “Grantor Trust”. As a result, for income tax purposes, there is no difference between owning the asset outright or putting it in a trust. Consequently, there are no tax benefits from placing your assets into a revocable living trust.
Texas revocable living trusts do have some benefits and can be part of a good estate plan if used under the right circumstances, but saving taxes during the grantor’s lifetime is not one of the benefits.