By Attorney Dan Vu
It’s tax season again, and therefore, it’s a good time to cover the basic rules on trusts and tax filing requirements. The good news is that your trust may very likely not require any special filings.
To determine what filing requirements must be met, a qualified tax professional will first need to determine what type of trust you have. However, beware, many (including some attorneys, CPAs, and accountants!) believe this means that they simply need to know if your trust is revocable or irrevocable. But actually the determination for tax purposes relates to whether your trust is a Grantor Trust or a Non-Grantor Trust.
If you have a Grantor Trust (whether revocable or irrevocable), then your trust is taxed to you (the Grantor) and you do not need to file a separate tax return for your trust. If a Payor (a bank, investment company, etc.) will issue a 1099 to your trust then the Payor should be provided a form W-9 that simply states that your trust runs under your personal social security number. When the Payor issues the 1099 it should list your personal social security number as the tax identification number, and therefore, it is included on your personal income tax return.
If you have a Non-Grantor Trust (always irrevocable), then your trust must file a separate tax return under a separate tax identification number. The trust tax return is completed on a form 1041. You should see a qualified tax professional to complete this form and to determine ways to reduce the trust’s tax burden since trust tax rates are usually higher than personal tax rates.
So as to not bore you with the complexities of why a trust is a Grantor Trust versus a Non-Grantor Trust, let me summarize the concept. If the Grantor retains too much control in a trust, and yes they can even retain control in an irrevocable trust, then the IRS determines that the Grantor should also be responsible for the taxes.
What this really means for you is that if a qualified tax professional determines that you have a Grantor Trust, good news, you only have to file your taxes the way you did before you had the trust. Just remember, if you have a 1099 issued to your trust, present the Payor with W-9 so that the Payor will list on the 1099 your personal social security number.