As estate planning attorneys serving Gloucester, Rockport, Manchester by the Sea, Beverly, and communities throughout the North Shore and Essex County, we know that one of the most frequent questions clients ask is how a revocable living trust is taxed. Revocable trusts are popular because they help families avoid probate, provide privacy, and allow for smooth management of assets. But when it comes to taxation, the rules are often misunderstood.

In Massachusetts, a revocable living trust does not provide income tax savings during your lifetime. Because the trust is revocable, the Internal Revenue Service and the Commonwealth treat the assets as though they are still owned by you personally. That means income earned by trust assets is reported on your individual tax return, just as if you had never created the trust. Understanding how Massachusetts General Laws and federal statutes apply to revocable trusts is critical to making informed planning decisions.

Taxation Of Revocable Living Trusts During Lifetime

When you create a revocable living trust in Massachusetts, you remain in control. You can amend it, revoke it, or move assets in and out. Because you retain this control, the IRS treats the trust as a “grantor trust” under 26 U.S.C. §§ 671–679. This means all income, dividends, and gains generated by trust property must be reported on your personal Form 1040 each year. You continue to use your Social Security number for tax reporting purposes, and no separate tax return for the trust is required.

Massachusetts follows the same approach. Under Massachusetts General Laws, Chapter 62, income tax is imposed on individuals, estates, and trusts. A revocable trust is disregarded for state tax purposes while you are living, meaning that income is included on your individual Massachusetts Form 1 return.

Estate And Inheritance Tax Considerations

Revocable living trusts also do not shield assets from Massachusetts estate tax. Under M.G.L. c. 65C, the Massachusetts estate tax applies to estates valued over $2 million as of 2023. Because assets in a revocable trust remain under your control, they are included in your taxable estate at death. This is one of the most significant limitations of a revocable trust.

Unlike irrevocable trusts, which can remove assets from your taxable estate if properly structured, revocable trusts provide no such benefit. If your estate is likely to exceed the Massachusetts threshold, we may recommend additional planning tools—such as irrevocable life insurance trusts or gifting strategies—to reduce estate tax exposure.

Taxation Of A Revocable Trust After Death

When you pass away, your revocable trust becomes irrevocable. At that point, the trust must obtain its own taxpayer identification number and begin filing its own income tax returns using IRS Form 1041. The Massachusetts Department of Revenue requires fiduciary income tax returns under M.G.L. c. 62, § 10 if the trust has Massachusetts-source income or a Massachusetts resident trustee.

The trustee must also ensure compliance with Massachusetts estate tax laws if the total estate value exceeds the threshold. This includes filing a Massachusetts estate tax return (Form M-706) and paying any applicable tax. Beneficiaries of the trust may also face personal income tax on distributions they receive, depending on the character of the income distributed.

Why Understanding Trust Taxation Matters

Many people mistakenly believe that creating a revocable living trust will reduce taxes. While these trusts offer significant advantages—such as avoiding probate under M.G.L. c. 190B and ensuring privacy—they do not provide tax savings during your lifetime or eliminate estate tax liability. Proper estate planning requires a full review of your assets, tax exposure, and long-term goals.

By understanding how Massachusetts law and federal tax law apply, we can help ensure that your trust accomplishes its intended goals while also addressing potential tax burdens.

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Massachusetts Revocable Trust Frequently Asked Questions

Does A Revocable Trust Help Me Avoid Massachusetts Estate Tax?
No. Assets in a revocable trust are still counted as part of your taxable estate under M.G.L. c. 65C. Only irrevocable trusts or other strategies can remove assets from your taxable estate.

Do I Need A Separate Tax ID Number For My Revocable Trust While I Am Alive?
No. As long as the trust is revocable and you are the trustee, you continue to use your Social Security number. Income is reported directly on your individual tax return.

What Happens To My Revocable Trust When I Die?
At your death, the trust becomes irrevocable and must obtain its own tax identification number. The trustee will file fiduciary income tax returns for the trust and manage distributions according to your instructions.

Will My Beneficiaries Owe Taxes On Distributions From My Trust?
It depends on the nature of the income. If the trust earns income and distributes it, that income is taxable to the beneficiaries. If the distribution is from principal, no income tax applies.

Does A Revocable Trust Avoid Probate In Massachusetts?
Yes, to the extent that assets are properly transferred into the trust before death. Avoiding probate is one of the main advantages of revocable trusts under Massachusetts law.

Can I Reduce Capital Gains Taxes With A Revocable Trust?
No. A revocable trust does not change the tax treatment of capital gains. Gains are reported on your personal return while you are alive. After death, beneficiaries generally receive a step-up in basis, potentially reducing capital gains tax.

Do I Still Need A Will If I Have A Revocable Trust?
Yes. A “pour-over will” is necessary to transfer any assets not titled in the trust into the trust upon death. Without it, those assets may pass under intestacy laws.

How Are Massachusetts Trust Income Taxes Different From Federal Taxes?
While Massachusetts generally follows federal rules for grantor trusts, trust income tax rates and thresholds may differ. Massachusetts taxes income of resident trusts under M.G.L. c. 62, § 10.

What Is The Biggest Tax Mistake People Make With Revocable Trusts?
The most common mistake is assuming a revocable trust saves on estate taxes. It does not. Proper planning requires evaluating additional tools if your estate exceeds the Massachusetts threshold.

How Can I Minimize Taxes If I Already Have A Revocable Trust?
We may recommend combining your revocable trust with irrevocable trusts, charitable planning, or lifetime gifting to reduce estate tax exposure while still enjoying the benefits of probate avoidance.

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Call The Sullivan Firm P.C. For a Free Consultation

At The Sullivan Firm P.C., we help families in Gloucester, Rockport, Manchester by the Sea, Beverly, and across the North Shore build estate plans that work in real life and under Massachusetts law. Understanding how a revocable living trust is taxed is essential to avoiding surprises and ensuring your plan truly protects your legacy.

Call The Sullivan Firm P.C. Today At 978-325-2721 For A Free Consultation. Our Gloucester office proudly serves Essex County residents who want to protect their families and preserve their wealth for future generations.