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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121114  
Subject: Re: Grantor Trust Reporting Requirements Date: 3/2/2011 9:28 PM
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An irrevocable trust is a separate tax-paying entity. As such, it will have to file a tax return and potentially pay income taxes. A trust will file Form 1041.

However, since the trust is paying out all of it's income to the beneficiaries, the trust will almost certainly pass it's taxable income through to the beneficiaries. And it does that on a K-1. You'll attach the K-1s to the trust return to support the deduction for income distributed to beneficiaries. And you'll provide each beneficiary with their individual K-1 so they can report their portion of the taxable income.

Large, nationwide tax preparation firms are highly likely to be unqualified to do this kind of tax work. You need a CPA or EA who has experience working with trusts. Lots of trusts. If they don't do at least a dozen or more each year, move on and keep looking. Unfortunately for you, these qualified people are not cheap, and can be fairly pricey. Such is the cost of setting up a trust like this.

The pundits who mention issuing a 1099 to the beneficiaries are idiots and should be ignored in full. They clearly don't know when they're in over their heads. And anything you get from internet message boards is equally suspect. (Did I just condemn my own advice??)

On your second question - the change in value of the trust's assets. Nothing is reportable until the assets are sold and the gain or loss is realized. Then that gain or loss is a capital item, very similar to capital gains and losses on your personal return. These gains/losses might be retained in the trust. Or they might be paid out to the beneficiaries. You'll have to read the trust document to see what to do with those. If they are retained in the trust, the trust will pay the tax on that income.

The trust will also need to apply for a Federal Employer ID Number (or FEIN). Yes, I know the trust does not have employees. That's just what the number is called. You will use that number much like you use your social security number. Give it to the broker who holds the trust assets so they can issue a 1099 to the trust. Give it to the bank who holds the trust's checking account. Put it on the trust's income tax return. DO NOT use your own social security number on any account holding the trust's assets.

Your state probably has laws regarding how the income and principal (sometimes called "corpus") of the trust are treated. The trust document itself is your first source of authority, but any place it's silent, your state laws will control. So you may need to consult an attorney on a regular basis.

You'll also want to pay a well-qualified person to prepare the trust's tax returns, and potentially to prepare an accounting of the trust's assets, receipts and disbursements.

There's lots of things going on with a trust. I hope you knew what you were getting into.

--Peter
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