Trust Return?

[Dave T]

Clients have had a multi level marketing business for several years. ( Alternative energy provider).

In 2018 they recruited their 17 year old daughter to be one of their consultants and set up a revocable trust for her earnings. entitled "________  Family Trust".

MLM company issues 1099 to the trust with approximately $3k in earnings.  Do I need to do a 1041 for the trust or should the income from the trust be recorded on the daughter's return?  Is it a deciding factor whether the earnings are distributed?

Thanks for any help with this.  I've not encountered something like this before.

 

Dave T

[SaraEA]

Because income was reported to the trust in its EIN, the IRS will be looking for a 1041.  Because it is a revocable grantor trust, the earnings belong on the return of whomever the grantor is (parents or child).  The 1041 will be blank, with a statement saying everything is reported on the grantor's return and another one describing the income.  It makes no difference if the income was distributed (like it makes no difference if your bank account paid you interest and you didn't withdraw it, it's still income).

[Randall]

8 hours ago, SaraEA said:

Because income was reported to the trust in its EIN, the IRS will be looking for a 1041.  Because it is a revocable grantor trust, the earnings belong on the return of whomever the grantor is (parents or child).  The 1041 will be blank, with a statement saying everything is reported on the grantor's return and another one describing the income.  It makes no difference if the income was distributed (like it makes no difference if your bank account paid you interest and you didn't withdraw it, it's still income).

If a grantor trust, shouldn't the income been reported in the grantor's ssn (child or parent)?  Since the income was reported in the trust EIN, shouldn't the income be reported on the K-1 schedule in the beneficiary's ssn?

[SaraEA]

Dave T described the trust as a revocable grantor trust.  That means the grantor retains control over the assets and distributions and can even terminate the trust if desired ("power of appointment" in IRS terminology).  Thus the income reverts to the grantor, as he or she still controls it. The trust must file a blank return with a statement ascribing all the income and expenses to the grantor.

[Terry D EA]

Let me throw my 2 cents worth in. While SaraEA very well maybe correct, I think it is always best to obtain the trust document (instrument) prior to filing any type of trust. The trust document will tell you the details you need to properly file the trust return as well as the taxation of the earnings and to whom it applies.

[DANRVAN]

SaraEA is basically correct, that is the general rule under reg 1.671-4 as it relates to grantor trust.

There are also two alternatives per the reg. The first is the most common in which the grantor provides his/her ss number to the payers so the 1099's are reported under their ss number instead of the trust id #.

Secondly, the reg allows the trust to issue 1099's to the grantor instead of reporting on form 1041, thus eliminating the need to file form 1041.

It is by the authority of the reg that the grantor is allowed to use his/her ss# for income reporting of the revocable trust income.

 

[Dave T]

Thanks for the help on this folks.

As a follow up, if the 1041 is filed as blank, does a K-1 need to be prepared and given to the daughter as beneficiary or the Mom as grantor?

Thanks again

Dave T

 

[DANRVAN]

No, but that is an interesting situation.

Actually the reporting methods described by reg  1.671-4  are optional, so I don't see any reason why a 1041 could not be filed to report the income if that is what the client really wants to do.

But as you indicate, that mom as grantor is the payee, so you might have an issue under the assignment of income doctrine by issuing k-1 to child.

[Max W]

This could be a trust set up to avoid SE tax.