In an earlier entry, I indicated that a revocable trust does not have any income tax advantages. But does it have any income tax disadvantages? Generally, the answer to this question is no with a few exceptions.
For example, under prior law the benefits of the one time $125,000 exclusion under former §121 and the two-year “rollover” of gain under former §1034 on the sale of a personal residence that were available to individuals if statutory requirements were met were held to apply to sales during the settlor’s lifetime of a personal residence held under a revocable trust arrangement. See Priv. Ltr. Rul. 9026036 (March 28, 1990) (holding the §121 exclusion applicable to a sale of a personal residence owned by a revocable trust); Rev. Rul. 66-159, 1996-1CB162 (holding the §1034 “rollover” likewise applicable). Although in 1997, § 1034 was repealed by Congress and §121 was amended to provide for a $500,000 exclusion on the sale of a principal residence ($250,000 for a single person) that can be taken every two years, the benefits of §121 as amended by the 97 Act should remain unaffected by the ownership of a principal residence under a revocable trust agreement.
Other tax areas that remain unaffected by reason of transferring assets to a revocable trust include the following:
(a) United States Savings Bonds transferred by the Grantor/Settlor to his or her revocable trust should not trigger taxation of the accrued interest. See Rev. Rul 58-2, 1958-C B 236
(b) If the grantor has previously sold an asset in exchange for installment obligations, the transfer of these obligations to the grantor’s Revocable trust will not constitute a taxable disposition under § 453B of the Code so that no gain will be triggered upon such transfer. See Rev Rul. 74-613, 1974-2 C.B. 153.
(c) Similarly, oil and gas properties may be transferred to the Grantor’s revocable trust without causing loss of percentage depletion. See Rev Rul. 84-14, 1984-1 C. B. 147
Next time, I will discuss what income tax advantages may be lost, or at least makes it more complicated, when certain assets are transferred to a revocable trust.
Hood Law Blog 