Living trusts must file tax returns if they have $600 or more in income for a given tax year. They may also have to file if the living trust is grantor-controlled or revocable marital trust and both spouses are still living using Form 1041. Here is a comprehensive guide on whether a living trust files a tax return. Check out Beem Tax Calculator to get a quick and accurate estimate of your federal and state tax refund.
Should a Living Trust File a Tax Return?
A Living Trust is a type of trust typically used in estate planning. It is usually helpful in controlling where one’s assets go before or after death. The person who starts and funds the Living Trust is the Grantor. A Living Trust is generally a Revocable Trust, indicating that the Grantor may remove Trust assets at any time.
Considering the Grantor is entitled to receive the Trust’s income and principal, the IRS taxes the Grantor on the Trust’s income. Noting that the Trust can use the Grantor’s social security number to set up the bank accounts and investments, all Trust income can be reported on the Grantor’s tax return. As a result, there is no need for a separate tax return for a Revocable Living Trust.
Understanding Living Trust and taxes
A Living Trust holds onto the Grantor’s assets for their own good throughout their life. It is then dispersed among the designated recipients by the Grantor’s chosen heir, called the “successor trustee”. Although some professionals use these terms interchangeably, these trusts may be irrevocable or revocable.
The onus to provide the Trustee (usually the same person) with a Form W-9 (the form on which individuals disclose their social security number) relies on the Grantor.
How is Trust Income Reported on Tax Returns?
All parties funding the Trust receive the Grantor’s social security number (as reflected on form W-9). Payments may be made to the Trust by these parties, but a Form 1099 reflects the payment made to the Grantor.
In their 1040 individual income tax return, the Grantor reports the trust payments reported on the form 1099. Hence, the income is paid to the Trustee and declared to the IRS under the Grantor’s social security number by both the payer and the Grantor.
A Revocable Living Trust will not require a separate tax return. The assets, however, are legally held by the Trust, which survives the death of the Grantor despite the Grantor’s taxation on the Trust’s income.
How to File Income From a Trust?
Beneficiaries of trusts are taxed on distributions. They are required to file Schedule K-1s. Upon receiving the income, the beneficiary must file a tax return. In addition, Form 1041 must be generated to report the total income earned by the Trust since the Grantor’s death.
Conclusion
Living Trusts can be an excellent tool to help grantors’ heirs avoid the costly and complex probate process. In addition to real estate, trusts can be applied to transfer financial assets, such as bank and brokerage accounts. To make sure the Trust is drafted in a way that is most beneficial for the Grantor, the tax considerations of a Trust should be reviewed with an experienced Estate Planning attorney. Beem Income Tax Calculator will help you in estimating taxes for the current tax year.
FAQS
What happens if you don’t file taxes on a trust?
You will owe the government a tax if it is $600 or above; not paying it will only incur interest.
Can a trust avoid capital gains tax?
Yes, you can sometimes avoid capital gains tax with essential measures.
Is there a way to avoid paying taxes on a trust?
In some cases, like revocable trusts.
Why is Trust good for taxes?
Living Trusts can be an excellent tool to help grantors’ heirs avoid the costly and complex probate process.
Is TDS deducted on Trust?
No, TDS is not deducted from the Trust.
