Preparing tax reports with funds


This is the second in a three-part series on taxing trusts. The first part explored how someone can “intrinsically have trust”, in another meaning, what is commonly known among estate planning attorneys or trust and estate attorneys as “grantor credit.” It also considered the advantages of using grantor credit. This is a link to the first article in the series. This second article in the series discusses the Taxpayer Identification Number (“TIN”) that a trust, including grantor trusts, must use. The third article in the series will look at taxes NonTrust the giver.

There is often confusion as to how a trust or sub-trust should report income and which tax identification number (TIN) to use. Treasury regulations make this very clear. Treasury Code No. 1.671-4 is the appropriate section.

Section 1.671-4(b)(2) provides that if a trust is treated as owned by one grantor or another person, the trustee must either a) provide the name and tax identification number of the grantor or other person treated as the trust owner and the title of the trust For all tax year payers, or b) Provide a tax identification number for the credit and address of the trust. Of course, the latter method can also be used if the trust is a non-custodial trust.

The grantor of the trust is described in Sections 671 through 677. For example, the revocation authority is listed as the authority to create a trust owned by the grantor under Section 676. Under Section 678, a person other than the grantor may be treated as the owner of the trust for income tax purposes. Under Section 678, a person other than the grantor will be treated as the owner of the trust if they have the ability to grant a group or income the trust for themselves (in another meaning general authority to assign), or if they previously had such authority and held other powers under Sections 671 to 677. There is an exception if the original grantor is still considered the owner of the trust. (Of course, upon the death of the grantor, the grantor is no longer considered the owner of the credit.)

Let’s look at two quick examples.

Example 1: Mary has a revocable confidence. The trustee of Mary’s trust (which may be her or it could be someone else) wants to use Mary’s TIN (which is her Social Security number). This is convenient because Mary has the power to withdraw the trust and is the owner according to Section 676. If the trustee prefers, he can choose to use a separate Payer Identification Number for the trust.

Example 2: Upon Mary’s death, her trust in John forms a secondary trust. Under the sub-trust, John has the right to withdraw assets and income from the trust. This type of trust is commonly referred to as an “access fund” or “divorce protection fund.” Since John has the right to withdraw and Mary is dead, John is considered the owner according to Section 678 of the Act. The trustee of a John sub-trust may use John’s TIN (which is his Social Security number) as the tax identification number (TIN) for the trust. If the trustee prefers, he can use a separate Payer Identification Number for the trust.

If the trustee elects to use the primary owner’s TIN, the income will go directly to the primary owner’s tax return and no separate tax return for the fund will be required. If the primary owner is not a trustee, the trustee will need to provide the primary owner with a statement showing all items of income, deduction and other information that may be necessary for the primary owner to take into account when calculating his or her taxable income.

The next article in the series will examine taxes on non-sponsoring trusts.

Stephen C. Hartnett, JD, LLM
Education Manager
American Academy of Estate Planning Lawyers, Inc.
9444 Balboa Street, Suite 300
San Diego, CA 92123
Phone: (858) 453-2128
www.aaepa.com

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