What Happens to a Revocable Trust Upon Death?

October 20, 2022

No one likes to plan for what will happen after they pass away, but at the same time, no one wants to pass not knowing if the people they love will be protected. That's why comprehensive estate planning is an essential task for everyone, no matter what their financial and family situation.

One of the components of an estate plan is a trust and will. These documents will include a list of assets, debts and clear instructions on how you would like your estate handled step by step. 

Your trust and will likely also include what's known as a revocable trust, which serves as the blueprint of the entire estate plan. This document gives the named trustee the power to control, distribute and manage all of one's assets while they're living and after they pass away.

The big question, of course, is what happens to a revocable trust upon death? We'll discuss that and a few related topics in-depth below.

What is the difference between a revocable trust and an irrevocable trust?

The main difference between a revocable trust and an irrevocable trust is the flexibility to make changes.

The grantor is able to make changes to a revocable trust any time, granted they're deemed competent to do so. Irrevocable trusts, by contrast, can typically only be changed if a court gives approval to do so, or if all the beneficiaries of the trust grant that approval.

One of the advantages of an irrevocable trust is it can protect the assets included within from some estate taxes and creditors. Revocable trusts can't do that.

Do all trusts become irrevocable at death?

In most cases, a trust becomes irrevocable upon the death of the grantor, or if the grantor eventually becomes incapacitated. This prevents a successor and/or beneficiary from making changes to the trust once the grantor has died. 

One of the main exceptions to this rule occurs with a joint revocable trust established by a married couple. There are also things to consider when it comes to estate planning when you are single.

What happens to a joint revocable trust when one spouse dies?

Generally speaking, revocable trusts only become irrevocable when both grantors die or become incapacitated. In most cases, this will happen automatically under the law. 

There are ways that this can be changed, though it must be done by both grantors while they are alive and able-minded. In this case, the estate planning attorneys can help the spouses add language to the trust that would change what happens when one of the spouses dies.

Can a surviving spouse change a revocable trust?

A surviving spouse is allowed to make wholesale changes to a revocable trust when the other spouse dies. The surviving spouse has the ability to either make amendments to the original trust or create a completely new one.

One of the major exceptions to this rule is if the spouses create an AB trust. This special trust operates as a joint revocable trust while both spouses are still alive.

After one of the spouses passes away, that trust then splits automatically into two separate trusts. Each of the new trusts will contain half the couple's assets and the separate property each spouse has. 

While the surviving spouse will serve as the trustee of both of these trusts, they aren't able to make changes to the trust in regard to the assets of the deceased spouse. This prevents the surviving spouse from, for instance, removing children as beneficiaries. 

When a revocable trust becomes irrevocable does the name change?

In most states, a revocable trust will retain the same name even if it becomes irrevocable. It will only operate differently but have the same name.

What happens when someone dies and their house is in a trust?

A trust will dictate the terms of what happens after the grantor dies. This includes a house. So, when someone dies and their house is in a trust, the trustee will follow the instructions of the trust and distribute the assets to the beneficiaries as outlined in the trust.

How is a revocable trust taxed after death?    

While the grantor is living, he or she will pay taxes on all the income generated by the trust under their own Social Security number. Once the grantor dies, though, the revocable trust becomes a separate taxpayer, according to the IRS. At this point, the trust must obtain a separate TIN.

When this happens, the trust may be required to establish new bank accounts and brokerage accounts, for example. 

Do beneficiaries pay taxes on trust distributions?

When the trust issues distributions to beneficiaries, it will deduct whatever income it distributes from its tax return. It will also issue the beneficiaries a K-1 form, which will outline how much of the distribution is principal and how much is interest.

Do beneficiaries pay taxes on revocable trust?

Whether beneficiaries will have to pay taxes on revocable trusts depends on a number of factors. This includes what distribution type it is, how much it is valued at, and what state the trust has been established in and where the beneficiaries live.

Sometimes, beneficiaries must claim the income they receive from revocable trust distributions on tax returns. If the distribution is part of the trust principal that doesn't generate income, though, the beneficiaries likely won't have a tax burden. 

What is the 65 day rule for trusts?

The IRS provides some wiggle room for trust distributions and when they can be claimed on tax returns. A distribution made from a trust in the first 65 days of a tax year can be counted as being distributed on the last day of the year before.

For example, if a distribution is made on February 25, 2023, the beneficiaries can claim it on their 2022 tax year return. In every year except leap years, the deadline for this is March 6. 


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