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In terms of income tax, any income generated by the RLT is reported on the granter’s personal tax return. As a simple trust, it may be obligated to distribute income to beneficiaries annually. If the trust accumulates income, it risks being classified as a complex trust.
Irrevocable Income Only Trust
In contrast, an irrevocable income-only trust functions as a standalone entity. In this structure, assets are owned by the trust, not by the individual. This distinction safeguards the trust's assets from liabilities, however, the granter forfeits control over these assets.
When it comes to taxation, if the trust distributes income to beneficiaries, it generally receives a tax deduction for that distribution, with the beneficiaries paying taxes based on their individual tax statuses.