The second method is for the trust to report the settlor`s income. In this method, the trust receives its own tax identification number and makes its information available to all income payers of the trust. The trustee then files Form 1099s, which indicates that the trust is the payer and the settlor is the beneficiary of the trust`s income. The trustee may avoid filing a Form 1099 if another form is used to report income, such as Form K-1. In addition, the trustee must provide a summary and submit information returns by filing Form 1096. The second method can be used with one or more settlors who own the income of the trust. Some irrevocable lifetime trusts are also constituent trusts and are therefore taxed as a revocable trust to the settlor. While these trusts do not require them to keep a separate tax identification number, it sometimes makes sense to assign them. We typically assign a federal tax number when we manage Medicaid asset protection trusts. If an irrevocable trust is not classified as a settlor trust, an EIN is required because the trust is considered a “separate entity” by the settlor.
This method of filing income tax does not require the trustee to file an income tax return. The trustee must obtain a W-9 to verify the grantor`s tax identification number. Meet Stacy Singer, a member of ACTEC Chicago. There are several methods of reporting income tax for constituent trusts. To give us more information on this topic, listen to Greg Gadarian, ACTEC Fellow from Tucson, Arizona, today. Welcome Greg! Where the trustee status of the settlor applies, the settlor or a beneficiary is considered to be the owner of the activity within the trust for income tax purposes. In this case, the deemed owner must report the activity of the trust on his personal income tax return (see article 1.671-2(a)). Settlor trust status may apply to a revocable or irrevocable trust, and there may be multiple owners of the same trust. If your trust requires an EIN, an application will be filed with the IRS as soon as possible.
The application includes information from the settlor and trust to answer a number of questions for the IRS. A trustee can request the IRS Form SS-4 online or by mail/fax. When a representative applies online, the EIN is available within minutes. If the application is completed by fax or mail, it may take a few weeks for the EIN number to be received. Alternatively, the trustee`s trustee files Form 1099 instead of Form 1041 (see section 1.671-4(b)(2)(iii)). In this case, ownership of the assets themselves is normally registered with the payer, so the income is initially reported to the trust as taxable. However, taxation of this income is transferred to the deemed owner when the trustee prepares Form 1099, which identifies the trust itself as the payer and the presumed owner as the beneficiary. However, in practice, this method may not be easier than filing a Form 1041 if there are several types of income (dividends, interest, rent, etc.) or several sales transactions. In addition, filing Form 1099, as described below, negates the trustee`s obligation to prepare the settlor`s tax information letter and send it to the deemed owner for disclosure on his or her personal return, unless the deemed owner is the trustee or co-trustee. In this case, submitting Form 1099 involves virtually the same effort as submitting Form 1041.
In 1996, the IRS issued regulations and developed two alternative methods. One of them is far inferior to all this. And in fact, I recently conducted a survey at a committee meeting to find out “if anyone has ever used another method two,” which includes: We send the escrow number, the name of the trust, and the name and address of the trustee to the seller, to the payer. What we do next is issue a 1099 to the settlor. So there are two sets of 1099 – the payer, if it is a brokerage account or a bank account, issues a 1099 to the trustee. The trustee turns around and issues 1099 to the settlor. So you could have 10, 11, 12,1099 or K-1 coming in, and then you turn around and spend 1099 on the constituent. Then you send all these things on a Form 1096, the submission form that you send to the IRS. No one has ever done it that way. It`s more work, and it`s more money to do it that way than it is any other way. A trust has a TIN that can be used for tax reporting. Trusts can be constituent trusts or non-settlor trusts.
If a trust is a non-settlor trust, it must have its own separate EIN as a TIN. If a trust is a settlor trust, it can use the settlor`s TIN or a separate TIN as the TIN`s TIN. For more information about trusts and their TIN and their reports, see Treasury Regulation §1.671-4. For most people, their TIN is their Social Security number. A settlor trust is a trust in respect of which the settlor has certain characteristics, such as the right to income or certain other powers developed in sections 671 to 677 of the IRC. If the settlor is deceased, a trust may be a constituent trust in respect of the beneficiary if the beneficiary has the general authority to name the trust under section 678 of the IRC. For the above reason, the best solution (both complying with the Regulations while “leaving a clear trail”) is not only to give payers the name of the settlor alone (as suggested in the regulations), but to indicate both the settlor`s name and the name of the trust in the payer`s records. Therefore, if “John Doe” created the trust, the name section of Form 1099 or Schedule K-1 would contain the following: “John Doe, Grantor of the Doe Dynasty Trust dated 12/30/2012”. There could also be situations – and we will not go into that – where a trust could move back and forth between the settlor and the non-settlor as two different items reported on the escrow tax return. If you go that far, you`ll probably need extra help reporting these things. If the settlor is the trustee or co-trustee and the second method of reporting is used, no separate Form 1041, Form 1099 or tax information letter from the settlor is required.