How Do Trusts Affect Taxes?
One of the most common questions people ask when they start estate planning is whether putting their assets in a trust will change their tax picture. The honest answer is that it depends on the type of trust, and for the most popular kind, the tax impact during your life is usually far smaller than people expect. The Law Office of Chad Foster helps Snohomish County families with wills and trusts.
The Revocable Living Trust Is Tax-Neutral While You Live
The revocable living trust is the workhorse of modern estate planning, and it is important to understand that it is generally tax-neutral during your lifetime. When you create a revocable living trust and name yourself as the trustee, you keep full control of the assets. You can move property in and out, change the terms, or revoke the trust entirely. Because you retain that control, the tax authorities treat the trust's income as your income. Begin with the difference between revocable and irrevocable trusts.
In practical terms, that means a revocable living trust usually does not get its own separate tax identification number while you are alive and serving as trustee. The interest, dividends, and other income the trust assets generate are generally reported as the grantor's income. The IRS grantor-trust reporting instructions explain the available reporting methods; using a separate identification number does not itself change who owes the tax. You do not get a special tax break for creating the trust, but you also do not take on a new tax burden. People choose revocable living trusts primarily for other reasons, such as avoiding probate, keeping their affairs private, and planning for the possibility of incapacity, not for income tax savings during life. Keep the tax analysis separate from how trusts avoid probate.
Things change after death. Once you pass away, a revocable living trust generally becomes irrevocable and is treated as a separate taxpayer, which is when a separate tax identification number and trust income tax filings typically come into play. That is a normal part of administering the plan, and the successor trustee handles it.
Where Estate Taxes Enter the Picture
The bigger tax conversation in estate planning is usually not income tax at all. It is the estate tax, which is a tax on the transfer of wealth at death. Here it helps to know that Washington has its own estate tax that is completely separate from the federal estate tax, and a larger estate can be exposed to both.
For deaths from January 1 through June 30, 2026, Washington's exclusion is $3,076,000. For deaths on or after July 1, 2026, it is $3,000,000. RCW 83.100.020 reflects the 2026 rollback; inflation adjustments resume in 2027 under the statutory formula. The date of death controls, not the date the estate is opened or the return is filed. Confirm the applicable amount with the Washington Department of Revenue.
It is also worth knowing that a simple revocable living trust, by itself, does not remove your assets from your taxable estate. Because you kept control of those assets during life, they generally still count toward your estate at death for tax purposes. Reducing estate tax exposure usually requires more advanced planning tools and irrevocable structures, which come with their own tradeoffs and are a decision to make carefully with professional guidance.
The Federal Layer, Including the GST Tax
On top of the state estate tax, there is a separate federal transfer tax system. The federal government imposes its own estate tax on large estates that exceed the federal exemption, and it also has a related tax called the generation-skipping transfer tax, or GST tax. The GST tax is designed to apply when assets skip a generation, for example when wealth passes from a grandparent to a grandchild in a way that bypasses the child's generation. Both of these are federal concepts with their own thresholds and rules, and they operate independently from Washington's estate tax. An estate can be small enough to owe no federal estate tax while still being large enough to owe Washington estate tax, because the state and federal thresholds are not the same.
Certain trusts are built specifically to manage exposure to these transfer taxes, but the mere existence of a trust does not automatically trigger or avoid them. What matters is how the trust is structured, who controls the assets, and how and when property passes to the next generation.
Why This Calls for Professional Guidance
Tax law in this area is detailed, it changes, and small drafting choices can produce very different outcomes. Because the Washington exclusion depends on the date of death and the federal rules carry their own thresholds, the smartest move is to work with qualified professionals who can run the numbers for your actual situation and the current year. This article explains general concepts and does not provide tax advice, so please confirm the current figures and your specific exposure with a qualified tax professional or attorney before acting.
A Local Note for Snohomish County Families
For families in Snohomish County, the key takeaways are straightforward. A revocable living trust is a powerful planning tool, but it is generally tax-neutral while you are alive rather than a tax shelter. The estate tax questions, both Washington's under chapter 83.100 RCW and the federal estate and GST taxes, are where real planning value can come from for larger estates. And because the exclusion amount now changes each year, timing and current figures matter.
If you are wondering how a trust might fit into your plan and what it could mean for your family's tax picture, the Law Office of Chad Foster can help you think it through and coordinate with your tax advisors. Reach out when you are ready to start the conversation.
Need help with a estate planning matter in King or Snohomish County? Learn about our wills, trusts, and estate planning services, or call 425.785.8679 for a consultation.