When you decide to set up a trust in California, you may not always consider how this trust will be taxed. Taxes can be different depending on the kind of trust you establish, so it is important to understand how this difference affects your taxes.
Regardless of the type of trust you set up, a trust will typically be taxed. Zacks Investment Research says that you usually owe taxes when you transfer assets as a gift. This is the case when you move these assets from a revocable trust to one of the beneficiaries and when you transfer assets into an irrevocable trust. You generally do not owe taxes on every transaction. Instead, financial gifts below $13,000 are usually exempt from taxation. Gifts above this amount are typically taxed.
You usually owe income taxes on a trust. However, the type of trust you establish determines which forms you need to file. You typically need to file income taxes for an irrevocable trust only if it grew by at least $600. If you set up a revocable trust, the trust's income generally needs to be reported on your personal tax return.
This difference in taxation occurs because U.S. tax laws handle irrevocable and revocable trusts differently. If you establish an irrevocable trust, this trust becomes its own independent substance. This means that the assets in this trust are owned by the trust. A revocable trust, however, is not considered a separate legal entity. This means that you are considered the owner of the assets inside the trust.
This information is general in nature. It should not be used in place of legal advice.