ETax847 Posted January 5, 2021 Report Share Posted January 5, 2021 New Client is creating an Irrevocable Gift Trust for his daughter that will be a grantor trust (client will be paying the taxable income during his lifetime). My questions are: 1) If no distribution is made, is it just a 1041, with a k1 issued to the client for the dividends, cap gains etc 2) when the daughter decides to take money out of the trust, how is that distribution treated in terms of reporting? Quote Link to comment Share on other sites More sharing options...
Abby Normal Posted January 5, 2021 Report Share Posted January 5, 2021 I think you mean 'revocable' trust, in which case the trust doesn't even file a tax return. https://www.thebalance.com/what-are-grantor-trusts-and-how-can-they-be-changed-3505545 But if it is an irrevocable trust and there are no distributions to the beneficiary, then the trust pays the tax at very high rates. 1 Quote Link to comment Share on other sites More sharing options...
ETax847 Posted January 5, 2021 Author Report Share Posted January 5, 2021 Hi Abby, Thanks for the link. Farther down in the article it states: An irrevocable trust can be treated as a grantor trust for tax purposes when the grantor meets Internal Revenue Code requirements to become the owner of the assets. The irrevocable trust can be disregarded as a separate tax entity in this case, and the grantor will be taxed for all its income. Irrevocable trusts are referred to as "intentionally defective grantor trusts" (IDGTs) when they treat the grantor as the owner for income tax purposes, but not for estate tax purposes. The grantor reports trust income on their personal return in this case and pays any taxes due just as if the trust were revocable, but the trust assets aren't included in the grantor's estate for estate tax purposes when they die. This is a major advantage not shared with revocable trusts. The client set this up to remove the assets from his estate. That being said: 1) If no distribution is made, is it just a 1041, with a k1 issued to the client for the dividends, cap gains etc or does not trust return need to be filed? 2) when the daughter decides to take money out of the trust, how is that distribution treated in terms of reporting? Thanks for all your help! Quote Link to comment Share on other sites More sharing options...
Lion EA Posted January 5, 2021 Report Share Posted January 5, 2021 Read the trust document. 3 Quote Link to comment Share on other sites More sharing options...
Abby Normal Posted January 5, 2021 Report Share Posted January 5, 2021 I've never had the type of trust that you describe, but if it's ignored for tax purposes, no 1041 is filed. If it's not ignored for tax purposes, the trust will pay taxes if the income is not distributed. 1 Quote Link to comment Share on other sites More sharing options...
Sara EA Posted January 6, 2021 Report Share Posted January 6, 2021 If assets are titled to the trust, the trust will get the tax docs in its EIN. Then a 1041 must be filed, but you can elect to report nothing but a statement that everything will be reported on the grantor's return and another statement listing the income and expenses the grantor must report. There is a code section for this that I don't have in front of me but it should be in the software elections. When the beneficiary receives a distribution, then K-1s will be issued. If the assets are still titled in the grantor's SS number, no trust return is required. 6 Quote Link to comment Share on other sites More sharing options...
Abby Normal Posted January 6, 2021 Report Share Posted January 6, 2021 12 hours ago, Sara EA said: If assets are titled to the trust, the trust will get the tax docs in its EIN. Then a 1041 must be filed, but you can elect to report nothing but a statement that everything will be reported on the grantor's return and another statement listing the income and expenses the grantor must report. There is a code section for this that I don't have in front of me but it should be in the software elections. When the beneficiary receives a distribution, then K-1s will be issued. If the assets are still titled in the grantor's SS number, no trust return is required. I do a lot of returns where the revocable trust's ein is on the forms, and I just report it on the 1040, and have never had a problem. But you're right. The instructions do say to file a blank 1041. Although, in practice, I doubt the IRS would really care. 1 Quote Link to comment Share on other sites More sharing options...
JoeFreitag Posted January 6, 2021 Report Share Posted January 6, 2021 As a grantor trust, you generate a 1041 and deliver to the client the grantor letter which shows all of the income. They then report that information on their personal tax return. When you produce the GRANTOR 1041, it will appear to be blank except for the Grantor Letter iirc. The Grantor Letter sort of acts like a K-1 but it's not the same thing at all. 2 Quote Link to comment Share on other sites More sharing options...
ETax847 Posted January 6, 2021 Author Report Share Posted January 6, 2021 Joe, I opened up the 2019 software and see what you mean when the Grantor Type Trust is selected. Is the grantor letter a form in ATX or something that is created outside of ATX and attached to the filing? Quote Link to comment Share on other sites More sharing options...
ETax847 Posted January 6, 2021 Author Report Share Posted January 6, 2021 Joe, ATX includes the Grantor Letter, so I should be all set! Thanks to everyone for all their help in clearing up my confusion! This forum has been a tremendous help over the years. Quote Link to comment Share on other sites More sharing options...
JoeFreitag Posted January 6, 2021 Report Share Posted January 6, 2021 3 minutes ago, ETax847 said: Joe, ATX includes the Grantor Letter, so I should be all set! Thanks to everyone for all their help in clearing up my confusion! This forum has been a tremendous help over the years. Yep - for the trust's portion it really operates very similar to a normal 1041 but looks different. I don't have ATX software but you'll need to see if the grantor letter rolls into the 1040. My software doesn't and I'm pretty sure it didn't on Drake either. You likely will need to enter everything again for your client's 1040. Quote Link to comment Share on other sites More sharing options...
ETax847 Posted January 6, 2021 Author Report Share Posted January 6, 2021 Good to know and thanks again for all of your help! Quote Link to comment Share on other sites More sharing options...
Catherine Posted January 8, 2021 Report Share Posted January 8, 2021 On 1/6/2021 at 10:02 AM, Abby Normal said: Although, in practice, I doubt the IRS would really care. We had an IRS person talk at a cont ed thing some years ago. Yes, best practice is to file a blank 1041 with only the top section filled out plus some verbiage about all being reported on taxpayer's 1040. The person said, off the record, that they rarely see those and pretty much don't worry about them. Quote Link to comment Share on other sites More sharing options...
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