Irrevocable Trust Grantor Tax Reporting

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frisbeeaddict
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Irrevocable Trust Grantor Tax Reporting

Post by frisbeeaddict » Sat Dec 08, 2018 10:40 am

Seasons Greetings!!

Have read bit about options of tax reporting for the family trust that my father (as grantor) set up earlier in the year for his beneficiaries.

Looks like myself as trustee has "option" of filling out form 1041 and attaching whatever tax documents Fidelity sends me? First question is do we really need to fill out a 1041 as it sounds to be optional, and our accountant will probably charge us several hundreds to do so.

Also, as grantor I am not sure what my father needs to include with his 1040 to report any trust income. I will leave this up to his accountant to do though would like to make sure they do it correctly as I doubt they have ever filed for grantor irrevocable trust before.

Gill
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Re: Irrevocable Trust Grantor Tax Reporting

Post by Gill » Sat Dec 08, 2018 10:54 am

Is this a revocable trust or is it irrevocable? You seem to be talking about both in your post. If it is irrevocable a 1041 needs to be filed. If it is a grantor trust with all income taxed to the grantor you do not.
Gill

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plannerman
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Re: Irrevocable Trust Grantor Tax Reporting

Post by plannerman » Sat Dec 08, 2018 6:31 pm

My wife and I established a Crummey Trust for our son several years ago. It is an irrevocable grantor trust with its own EIN. I am the trustee. We gift money to the trust annually and our son has 30 days to remove the gift or it becomes irrevocable. The trust income is taxed to our son, the grantor. As the trustee, I file a 1041 with zero income that ties the income under the trust EIN to the our son's SSN. I simply attach a spreadsheet to the 1041 that shows the income from the trust's 1099s and his SSN.

This has been working for 21 years

plannerman

Gill
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Re: Irrevocable Trust Grantor Tax Reporting

Post by Gill » Sat Dec 08, 2018 6:41 pm

plannerman wrote:
Sat Dec 08, 2018 6:31 pm
My wife and I established a Crummey Trust for our son several years ago. It is an irrevocable grantor trust with its own EIN. I am the trustee. We gift money to the trust annually and our son has 30 days to remove the gift or it becomes irrevocable. The trust income is taxed to our son, the grantor. As the trustee, I file a 1041 with zero income that ties the income under the trust EIN to the our son's SSN. I simply attach a spreadsheet to the 1041 that shows the income from the trust's 1099s and his SSN.

This has been working for 21 years

plannerman
You describe your son as the grantor. You were the grantors and he is the beneficiary. Also, it’s not a grantor trust but rather an irrevocable inter vivos trust.
Gill

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plannerman
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Re: Irrevocable Trust Grantor Tax Reporting

Post by plannerman » Sat Dec 08, 2018 7:24 pm

Gill,

Thanks for the clarification. I stand corrected.

plannerman

bsteiner
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Re: Irrevocable Trust Grantor Tax Reporting

Post by bsteiner » Sat Dec 08, 2018 8:58 pm

At least until this year, most (though not all) trusts were grantor trusts while the grantor was living. By paying the income tax on the trust's income and gains, the grantor is effectively shifting additional wealth out of his/her estate, free of transfer taxes.

Until 1995, irrevocable grantor trusts had to file blank fiduciary income tax returns with a separate sheet attached showing the income that was taxable to the grantor. In 1995, Treas. Reg. § 1.671-4 was issued, which in most cases allows an alternative procedure whereby the trust may use the grantor's social security number. In that case, the trust need not file returns. https://www.law.cornell.edu/cfr/text/26/1.671-4.

Most of our clients use this procedure so as not to have to file returns for the trust as long as it's a grantor trust. However, some clients use the pre-1995 procedure where the trust gets its own taxpayer identification number and files a blank return with a separate sheet showing the income that's taxable to the grantor.

Between the substantial increase in the estate tax exclusion amount, many people who created trusts to shift wealth out of their estates are no longer concerned about estate taxes. Between that and the $10,000 limit on the deduction for state and local taxes for 2018-2025, many trusts have given up grantor trust status so they could file as separate taxpayers. In some cases that allows an additional $10,000 deduction for state and local taxes. In other cases, since different states have different ways of determining when a trust is subject to state income tax, that allows the trust to avoid state income taxes.

frisbeeaddict
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Re: Irrevocable Trust Grantor Tax Reporting

Post by frisbeeaddict » Sun Dec 09, 2018 4:10 pm

This is an irrevocable trust in Florida, where we do not have state income taxes as yet...

I believe the attorney whom helped us create the trust said to treat it as a grantor trust, although I an not familiar with how that does or does not apply to it being irrevocable vs revocable etc?

Sounds like I'm best.to file 1041 with my father's ssn?
Last edited by frisbeeaddict on Sun Dec 09, 2018 4:22 pm, edited 1 time in total.

Gill
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Re: Irrevocable Trust Grantor Tax Reporting

Post by Gill » Sun Dec 09, 2018 4:16 pm

frisbeeaddict wrote:
Sun Dec 09, 2018 4:10 pm
This is an irrevocable trust in Florida, where we do not have state income taxes as yet...

I believe the attorney whom helped us set the trust up said to treat it as a grantor trust, although I an not familiar with how that does or does not apply to it being irrevocable vs revocable etc?

Sounds like I'm best.to file 1041 with my father's ssn?
If the attorney said to treat it as a grantor trust you don’t need to file a 1041. Report all income on the grantor’s return. A trust may be revocable or irrevocable and still be taxed as a grantor trust if drafted properly.
Gill

frisbeeaddict
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Re: Irrevocable Trust Grantor Tax Reporting

Post by frisbeeaddict » Sun Dec 09, 2018 4:31 pm

Ok, thank you Gill, really appreciate the clarification.

Imagine fidelity will issue a 1099 DIV for any trust dividends (entire trust consists of few ETFs in one account) and I can give that to my father's accountant. My father will simply report these dividends as qualified dividends on his 1040 line 9, or is there a different form my father's accountant will use to report the trust income?

From what I read in online snippets it did not sound compulsory to file a 1041, though some online advice said that it was good idea, though that may have simply been tax accountants making work.

bsteiner
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Re: Irrevocable Trust Grantor Tax Reporting

Post by bsteiner » Sun Dec 09, 2018 5:37 pm

bsteiner wrote:
Sat Dec 08, 2018 8:58 pm
At least until this year, most (though not all) trusts were grantor trusts while the grantor was living. By paying the income tax on the trust's income and gains, the grantor is effectively shifting additional wealth out of his/her estate, free of transfer taxes.

Until 1995, irrevocable grantor trusts had to file blank fiduciary income tax returns with a separate sheet attached showing the income that was taxable to the grantor. In 1995, Treas. Reg. § 1.671-4 was issued, which in most cases allows an alternative procedure whereby the trust may use the grantor's social security number. In that case, the trust need not file returns. https://www.law.cornell.edu/cfr/text/26/1.671-4.

Most of our clients use this procedure so as not to have to file returns for the trust as long as it's a grantor trust. However, some clients use the pre-1995 procedure where the trust gets its own taxpayer identification number and files a blank return with a separate sheet showing the income that's taxable to the grantor.

Between the substantial increase in the estate tax exclusion amount, many people who created trusts to shift wealth out of their estates are no longer concerned about estate taxes. Between that and the $10,000 limit on the deduction for state and local taxes for 2018-2025, many trusts have given up grantor trust status so they could file as separate taxpayers. In some cases that allows an additional $10,000 deduction for state and local taxes. In other cases, since different states have different ways of determining when a trust is subject to state income tax, that allows the trust to avoid state income taxes.
frisbeeaddict wrote:
Sun Dec 09, 2018 4:31 pm
...
From what I read in online snippets it did not sound compulsory to file a 1041, though some online advice said that it was good idea, though that may have simply been tax accountants making work.
As I previously noted, most trustees use the grantor's social security number for grantor trusts, but some trustees get a taxpayer identification number for the trust and file a blank return with an attached statement showing how much income is taxable to the grantor. There are reasons that some trustees prefer to do it that way. It's not to create work for the accountant.

You may want to ask your lawyer which method he/she recommends that you use.

samsmith
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Re: Irrevocable Trust Grantor Tax Reporting

Post by samsmith » Sun Dec 09, 2018 6:25 pm

I have a similar situation. An irrevocable grantor trust that is set up with an account at Fidelity. We use, as bsteiner mentions, the grantor's social security number. That means no 1041 is filed and the interest, dividends and capital gains are all picked up on the grantor's tax return. BUT...since the trust is using the grantor's SSN - that is the number that was given to Fidelity. Thus, the 1099 from Fidelity has the grantor's SSN on it. So everything matches up for the IRS. And there is no special or different form that the grantor uses when doing their taxes. When you opened the trust account at Fidelity what EIN number did you give Fidelity? Did you give them the grantor's SSN?

Gill
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Re: Irrevocable Trust Grantor Tax Reporting

Post by Gill » Sun Dec 09, 2018 6:40 pm

frisbeeaddict wrote:
Sun Dec 09, 2018 4:31 pm
Ok, thank you Gill, really appreciate the clarification.

Imagine fidelity will issue a 1099 DIV for any trust dividends (entire trust consists of few ETFs in one account) and I can give that to my father's accountant. My father will simply report these dividends as qualified dividends on his 1040 line 9, or is there a different form my father's accountant will use to report the trust income?

From what I read in online snippets it did not sound compulsory to file a 1041, though some online advice said that it was good idea, though that may have simply been tax accountants making work.
The income will be reported on your father’s return in exactly the same way as he might report any other dividend or interest income.
Gill

frisbeeaddict
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Re: Irrevocable Trust Grantor Tax Reporting

Post by frisbeeaddict » Sun Dec 09, 2018 11:02 pm

This irrevocable trust was set up with its own ein if I'm not mistaken. Imagine the 1099 div filed with my father's 1040 will tie the trust reporting to the 1040 for the IRS without a 1041 being filed?

samsmith
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Re: Irrevocable Trust Grantor Tax Reporting

Post by samsmith » Mon Dec 10, 2018 12:06 am

Kind of messy. I think you want to give Fidelity the SSN of the grantor for the trust's account with Fidelity. Here's what the IRS says:

Optional Method 1. For a trust treated as owned by one grantor or by one other person, the trustee must give all payers of income during the tax year the name and TIN of the grantor or other person treated as the owner of the trust and the address of the trust.

Likely to late for this year, but I would work to give Fidelity your Dad's SSN for the trust. That's what you (and the IRS) want. And then the IRS can easily match the trust incoenm with your Dad's tax return - where it is getting picked up. My 2 cents.

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