The assets of the living trust are subject to federal and state taxes. Although a revocable living trust has advantages as an alternative to a will, it can present problems that your attorney should discuss with you. Trusts may also be irrevocable, which means that they cannot be changed or terminated at any time. An irrevocable trust may serve to reduce death taxes and, in some cases, income taxes. With an irrevocable trust, the trust assets are placed out of the control of the trustor.
Trusts can reduce income and death taxes.
Income tax, of course, must be paid on income earned such as interest, dividends, or rent. Under certain circumstances, the income tax is payable by the trust or by the beneficiaries of the trust rather than by the person who created the trust. Consider the example of the person who is supporting an aged relative. The aged relative has a low income and thus a lower income tax. By placing an income-earning asset in an irrevocable trust and paying the income to the relative, the trust will reduce the overall income tax of the trustor but will, at the same time, provide the same amount of support.