Are Revocable Trust Assets Included in Estate Tax Returns?
Unlike irrevocable trusts, revocable trusts ordinarily offer no relief from family trust estate tax, because the grantor maintains control over the assets he places into it. As long as an estate's assets remain in control of a revocable trust, the estate taxes are included on Form 706 (Federal Estate Tax Return). Whether you're acting as trustee for someone else's trust or doing your own estate tax planning, the value of the estate comes down to the worth of its assets less certain allowable deductions, and these assets must be included when you complete Form 706.
If an estate's assets are still in control of a revocable trust, fill out Form 706 to report the estate's assets and determine its tax liability.
Evaluating Revocable Trust Assets
Your taxable estate – which is not necessarily the same as your probate estate – includes virtually everything you own and even anything of which you own a share. If you hold property jointly with someone else, your percentage of ownership must be included on Form 706. Assets passing directly to named beneficiaries, such as life insurance proceeds or retirement accounts, must also be reported, even though they don't require probate to transfer ownership.
One of the challenges of Form 706 is establishing accurate values for your assets. The IRS doesn't allow you to take an educated guess, nor would you want to. If you're wrong and you guess high, you could end up costing your estate tax dollars. The IRS wants your property's fair market value – what someone would reasonably be willing to pay for the asset under normal economic circumstances when neither party is desperate to buy or sell.
Value can be relatively easy to ascertain when you're dealing with stocks, bonds, or liquid accounts. For other assets, such as real estate, your trustee may have to arrange for appraisals. Value is typically established as of the date of your death, although the IRS allows certain variations.
Exceptions and Deductions to Reduce Revocable Trust Estate Tax
Certain assets are not part of the taxable estate because you or your revocable trust no longer have control over them. These include, but are not limited to, a life insurance policy that you've transferred to someone else's ownership.
Form 706 also allows your trustee to take certain deductions to subtract from the estate's value for tax purposes. Your estate only pays taxes on the portion of value that exceeds that year's estate tax exemption. The exemption can fluctuate from year to year depending on current tax law, but it's a dollar amount that your trust can transfer to beneficiaries tax-free. After valuing your assets and taking available deductions, Form 706 determines if your estate is worth more than this exemption amount, and the balance is subject to tax.
Deductions include any assets transferred to your spouse – these are not taxable – as well as any debts existing at the time of your death that your estate must pay. They also include property your trust donates to charity and costs of settling your estate.
Capital Gains Factors for 2019
If your beneficiaries decide to sell the assets you've bequeathed to them, any profit they realize is subject to capital gains tax. The cost basis is the value of the property at the time of your death, however, not when you originally acquired it. For example, you may have purchased your home for $150,000 but it's worth $500,000 at the time of your death. If your trust distributes this asset to your daughter and she sells the property for $500,000, she owes no capital gains tax. She does not have to pay tax on the difference between $150,000 and its current value. If your trustee files Form 706, it establishes the cost basis for your daughter so she doesn't have to claim capital gains.
For the 2019 tax year, for a single filer, the short term capital gains rates (for assets held less than one year) have been changed to reflect the new tax brackets, as they are taxed as ordinary income:
- Income up to $9,700 is taxed at 10 percent;
- Income from $9,701 to $39,475 is taxed at 12 percent;
- Income from $39,476 to $84,200 is taxed at 22 percent;
- Income from $84,201 to $160,725 is taxed at 24 percent;
- Income from $160,726 to $204,100 is taxed at 32 percent;
- Income from $204,101 to $510,300 is taxed at 35 percent; and
- Income over $510,301 is taxed at 37 percent.
Long term capital gains (for assets held longer than one year) are taxed depending upon the taxpayer's income bracket. Long term capital gains in 2019 are tax free for taxpayers who make $39,375 or less, but they're taxed at 15 percent for those who earn between $39,376 and $434,550, and 20 percent for those who earn more than $434,550.
Capital Gains Factors for 2018
For the 2018 tax year, for a single filer, the short term capital gains rates (for assets held less than one year) have been changed to reflect the new tax brackets, as they are taxed as ordinary income:
- Income up to $9,525 is taxed at 10 percent;
- Income from $9,526 to $38,700 is taxed at 12 percent;
- Income from $38,701 to $82,500 is taxed at 22 percent;
- Income from $82,501 to $157,500 is taxed at 24 percent;
- Income from $157,501 to $200,000 is taxed at 32 percent;
- Income from $200,001 to $500,000 is taxed at 35 percent; and
- Income over $500,000 is taxed at 37 percent.
Long term capital gains in 2018 are tax free for taxpayers who make $38,600 or less, but they're taxed at 15 percent for those who earn over $38,600 but less than $425,800, and 20 percent for those who earn above $425,800.
Beverly Bird has been writing professionally for over 30 years. She specializes in personal finance and w, bankruptcy, and she writes as the tax expert for The Balance.