By: David L. Crockett, Attorney, CPA
UCLA Law School , J.D. ’69, UC Berkeley ’66
901 Dove St., Ste 120, Newport Beach, CA 92660
WHAT TAX RETURNS HAVE TO BE FILED AFTER A REVOCABLE
(LIVING) TRUST IS FORMED?
Answer: NONE, as long as both spouses are alive.
The income from the revocable (living) trust is to be reported on the personal income tax returns of the Trustors (persons who formed the trust). The IRS and California taxing authorities do not recognize a living (revocable) trust as a separate taxpaying entity as long as both Trustors are alive. Thus, in a typical living trust situation entered into by a married couple, the income generated by the trust assets are reported on the Trustors’ personal income tax returns, exactly as before the trust was formed. For example: Before the trust was formed, John and Jane Doe, the Trustors, had $100 in dividends from their Charles Schwab brokerage account which was reported on their personal returns and they received a form 1099 under the husband’s social security number. After the trust is formed, the Charles Schwab account is still under the husband’s social security number but the name on the account is changed to John and Jane Doe, Trustees. The form 1099 for the $100 in dividend income will be show the husband’s social security number but with the recipient name as John and Jane Doe, Trustees. The Trustors will report the $100 dividend income on their personal joint return.
Answer after one spouse passes away, two sets of returns might be due.
First, individual income tax returns are due for the year in which a person dies, even if he or she does not live until the end of the year. Second, in addition to the individual tax returns, fiduciary income tax returns, forms 1041 federal and 541 for the state are due for the portion of the trust belonging to the spouse who passed away, if that portion is set up in a separate trust. Typical revocable (living) trusts will require that the trust assets be di-vided into the living (surviving) spouse’s half and the deceased spouse’s half. The de-ceased spouse’s portion of the trust changes into a permanent (“irrevocable”) trust and at that point the IRS and State tax authorities recognize that irrevocable trust as a taxpay-ing entity with its own tax ID# and it must file its own tax returns. After the year of death, the surviving spouse continues to file individual tax returns under his or her social security number. Also, the irrevocable trust files its own tax returns for as long as the irrevocable trust is in existence. If there is no separate trust required, then no fiduciary returns are due.
Technical terms-grantor trust.
According to the tax laws, IRC §671-679, a “grantor trust” is any trust in which the Trustor/Grantor retains control over the income or princi-pal, or both to such an extent that he is regarded as the substantial of the trust property and income. The power to revoke is a typical retained power that makes a trust a grantor trust. Thus, the typical living trust used in estate planning is a revocable trust and hence a “grantor trust”. The income tax significance is that the taxable income generated by the grantor trust is reported on the income tax return form 1040 of the Trustor/Grantor. Also, the tax due on such income is paid by the Trustor/Grantor on his personal income tax return, form 1040. Thus, a grantor trust does not file any income tax return.