Elizabeth creates a revocable living trust and transfers her investment portfolio into the trust. The trust is for the sole benefit of Elizabeth for life and at her death the assets pass to her daughter, Sandra. Who is responsible for capital gains tax on gains realized during Elizabeth's lifetime?

Elizabeth creates a revocable living trust and transfers her investment portfolio into the trust. The trust is for the sole benefit of Elizabeth for life and at her death the assets pass to her daughter, Sandra. Who is responsible for capital gains tax on gains realized during Elizabeth's lifetime?

• A. Elizabeth
• B. Sandra
• C. The trust
• D. The estate

Answer: (A)

In a revocable living trust, the grantor is treated as the owner for income tax purposes because they retain control over the assets and the trust can be revoked. This means any capital gains realized from assets held in the trust during the grantor’s lifetime are taxed to the grantor, not to the trust or to the beneficiaries. So Elizabeth is responsible for the capital gains tax on gains realized while she is alive, on her personal tax return. If the assets were sold after Elizabeth’s death or if the trust were irrevocable, the tax situation would change—for example, the trust or the estate might pay taxes or the beneficiaries could face tax consequences—but for gains realized during Elizabeth’s lifetime, the responsibility sits with Elizabeth.

In a revocable living trust, the grantor is treated as the owner for income tax purposes because they retain control over the assets and the trust can be revoked. This means any capital gains realized from assets held in the trust during the grantor’s lifetime are taxed to the grantor, not to the trust or to the beneficiaries. So Elizabeth is responsible for the capital gains tax on gains realized while she is alive, on her personal tax return.

If the assets were sold after Elizabeth’s death or if the trust were irrevocable, the tax situation would change—for example, the trust or the estate might pay taxes or the beneficiaries could face tax consequences—but for gains realized during Elizabeth’s lifetime, the responsibility sits with Elizabeth.