A revocable trust is usually treated the same as the individual who created the trust. For federal income tax purposes, a revocable trust is a “grantor trust” under section 676 of the Code. Therefore, all items of income and expense of the trust flow through to the grantor.
However, for some purposes, a revocable trust may not be treated the same as the grantor. Here are two examples.
First, let’s say John has an IRA and he makes it payable to his friend, Carlos. At John’s death (on or after January 1, 2020), Carlos would ordinarily have to take all the assets out of the IRA by the end of the year that includes the 10th anniversary of John’s death, the so-called “10-year rule.” If John named Carlos’ revocable trust, the result would be different. In that case, assuming Carlos were still alive at John’s death, Carlos’ trust would not qualify as a “look through” trust because it would not have been irrevocable by the date of John’s death. As a result, the IRA would need to pay out under the “5-year rule” applicable when a non-individual is the beneficiary.
Here’s another example of how a revocable trust and the individual may not be treated the same. Under Missouri law, a purchaser owes sales tax on a vehicle upon purchase. If that vehicle is stolen or destroyed and there are insurance proceeds, those offset the price of the replacement vehicle purchased and thereby reduce the sales tax. In a recent case, Collison v. Director of Revenue (https://www.courts.mo.gov/file.jsp?id=176497), the Missouri Supreme Court held that a revocable trust wasn’t the same as an individual for purposes of the Missouri sales and use tax. In Collison, a couple (in their individual names) owned a vehicle and purchased a replacement vehicle in their trust. The Court didn’t allow the insurance proceeds the couple received from their first vehicle to be applied against the price the trust paid for the replacement vehicle.
While revocable trusts are treated the same as the grantor for federal income tax purposes, they may not be treated as the same for other purposes. It’s important to check the applicable rules.
Stephen C. Hartnett, J.D., LL.M.
Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128