Question

Describe the tax implications of a Revocable Trust versus a Personal Will for John Jacob’s estate valued at $6,200,000 with wife as beneficiary. He also has a $2,500,000 life insurance policy, owned by the revocable trust with the beneficiaries being his three children.

Answer 1

Jacob's wife is a beneficiary of his estate that is valued at $6,200,000. A beneficiary (Jacob's Wife) of a revocable trust does not have to pay income taxes on the distributions from the trust since the trust grantor (Jacob) has already paid these taxes. In case it is an irrevocable trust, the beneficiaries are taxable at ordinary income tax rates.

The main reason for this disparity is that the assets of a revocable trust are considered the property of the grantor, while an irrevocable trust is treated as an independent legal entity that owns its assets. Hence they are treated little differently. So, as long as Jacob is alive, all trust income is taxed as his personal income, and Jacob must report it on Form 1040 tax return even if it remains in the trust. But beneficieries need not pay taxes on the distributions of the trust or on the insurance policy of the trust.

After the death of a person, his property devolves in two ways - according to his Will i.e. testamentary, or according to the respective laws of succession, when no Will is made. In this case, Jacob's wife is the principal beneficiery of Jacob's personal will. Jacob's estate is taxable under inheritence tax once it comes to Jacob's wife.