Revocable funds are not always treated the same as an individual

A revocable trust is usually treated like the person who created the trust. For federal income tax purposes, the revocable credit is a “grantor credit” under Section 676 of the Act. Therefore, all items of income and expense of the trust flow to the grantor.

However, for some purposes, a revocable credit may not be treated like the grantor. Here are two examples.

First, let’s say John has an IRA and makes it payable to his friend Carlos. Upon John’s death (on or after January 1, 2020), Carlos normally has to withdraw all assets from the IRA by the end of the year which includes 10NS Anniversary of John’s death, the so-called “ten-year rule”. If John named Carlos’s revocable trust, the result would be different. In this case, assuming Carlos was still alive after John’s death, the Carlos trust would not qualify as a “look through” trust because it would not be irrevocable by the date of John’s death. As a result, the IRA will need to pay under the “five-year rule” that applies when a non-individual person is the beneficiary.

Here’s another example of how a revocable trust and an individual should not be treated the same way. Under Missouri law, the purchaser owes sales tax on the vehicle upon purchase. If that vehicle is stolen or destroyed and there is insurance proceeds, this offsets the price of the replacement vehicle purchased and thus reduces sales tax. in a recent case, Collison vs. Director of Revenue ( at Collison, A couple (with their individual names) owned a car and purchased a replacement car on their own. The court did not allow the insurance proceeds the couple got from their first car to be applied against the price the trust paid for the replacement car.

While revocable trusts are treated like a grantor for federal income tax purposes, they may not be treated as the same for other purposes. It is important to check the rules in place.

Stephen C. Hartnett, JD, LLM
Education Manager
American Academy of Estate Planning Lawyers, Inc.
9444 Balboa Street, Suite 300
San Diego, CA 92123
Phone: (858) 453-2128

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