What is the tax consequence if the grantor revokes a trust?

When a grantor revokes a trust, the tax consequences are generally minimal, and the most appropriate answer is that no tax consequences arise. This is primarily because revocation leads to a reversion of the assets back to the grantor, and these assets are still considered part of the grantor's estate. The Internal Revenue Service (IRS) views a revocable trust as a disregarded entity for tax purposes, meaning the grantor is still treated as the owner of the trust assets as long as the trust is in effect. Therefore, when the trust is revoked, the assets return to the grantor without triggering income tax or gift tax implications for the grantor.

The statement about tax implications depending on the trust's income does not apply in this situation since the act of revocation itself does not generate any taxable events; it merely reverts the assets to the grantor. Similarly, the option regarding the distribution of the trust assets as a gift is misleading because revoking a trust does not constitute a gift; it's a transfer back to the grantor. Finally, the suggestion that the grantor's estate incurs tax on the trust is also incorrect in the context of revocation, as any tax consequences related to the trust assets would have been applicable