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Posted by Paul Thomas, CPA on November 6, 2007, 6:25 am
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>>> When one establishes a Revocable Trust to shield assets from
>>> probate, what ramifications, if any, are there for tax
>>> preparation? Does a tax return of any kind have to be filed
>>> for the trust? Would I still file a 1040?
>> The filing requirement for the 1041 are independent of the
>> filing requirements for the 1040.
>> Each stands on its own.
>> Generally, the filing requirement depends on income.
>> Remember to also check the state filing requirements for the
>> individual and trust tax returns.
>> Each state has its own rules.
> I'm not clear what your answer means. Do you disagree with
> the other posters that a 1041 is not needed and that I
> report income on my 1040 just as I always have? What do
> you mean about the income requirement determining filing?
http://www.irs.gov/businesses/small/article/0,,id=106551,00.html
Q: What is a grantor trust?
A: "Grantor trust" is a term used in the Internal Revenue
Code to describe any trust over which the grantor or other
owner retains the power to control or direct the trust's
income or assets. If a grantor retains certain powers over
or benefits in a trust, the income of the trust will be
taxed to the grantor, rather than to the trust. (Examples,
the power to decide who receives income, the power to vote
or to direct the vote of the stock held by the trust or to
control the investment of the trust funds, the power to
revoke the trust, etc.)
>>>>> All "revocable trusts" are by definition grantor trusts.
An "irrevocable trust" can be treated as a grantor trust if
any of the grantor trust definitions contained in Internal
Code §§ 671, 673, 674, 675, 676, or 677 are met. If a trust
is a grantor trust, then the grantor is treated as the owner
of the assets, the trust is disregarded as a separate tax
entity, and all income is taxed to the grantor.
Q: Do trusts have a requirement to file federal income tax
returns?
A: Trusts must file a Form 1041, U.S. Income Tax Return for
Estates and Trusts, for each taxable year where the trust
has $600 in income or the trust has a non-resident alien as
a beneficiary.
>>>>> However, if the trust is classified as a grantor trust, it is not
>>>>> required to file a Form 1041, provided that the individual grantor
>>>>> reports all items of income and allowable expenses on his own Form
>>>>> 1040, U.S. Individual Income Tax Return. Thus, the grantor/individual
>>>>> would pay the total tax liability upon the filing of his return for
>>>>> that taxable year.
All the income can be reported on your individual income tax
returns if you like.
--
Paul A. Thomas, CPA
Athens, Georgia
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