income tax irrevocable trust

Income Tax Reporting Requirements for Grantor Trusts

This post address the income tax filing requirements for revocable trusts and for certain kinds of irrevocable trusts. 

Trusts are popular tools for many reasons, including probate avoidance and asset protection. Essentially, there are two types of trusts: revocable trusts and irrevocable trusts.

People easily get confused about the income tax filing requirements for trusts. Some trusts must file a tax return. Others do not. Here's a quote from the IRS website regarding a trust's requirement to file an income tax return:

"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."

It's important to determine whether a trust is a grantor trust. A trust is treated as a grantor trust when a grantor or another person is treated as the owner of the trust income or principal or both for federal income tax purposes. This means the grantor or such other person must include in the computation of taxable income all items of “income, deductions, and credits against tax of the trust” attributable to the portion of the trust over which the grantor
or such other person is deemed to be the owner. In other words, the grantor or such other person treated as the owner of the trust is taxed to the same extent as if he or she had received the item directly. Section 671; Treas.Reg. §1.671-2(d).

Sections 673 through 679 set forth the situations in which a grantor or another person is deemed to be the owner of the trust, thereby creating a grantor trust. 

The power to revoke a trust is one of the powers that causes a trust to be a grantor trust. Thus, all revocable trusts are grantor trusts. 

Regarding an irrevocable trust, we must look to the provisions of the trust to determine if powers were retained by the grantor cause the trust to be a grantor trust. Powers often provided in an irrevocable trust that cause the irrevocable trust to be treated as a grantor trust include the power to control the beneficial enjoyment, and the distribution of the trust income to the grantor or grantor's spouse.

If your irrevocable trust is a grantor trust, then all income earned by your trust is reported on your personal income tax return, not a separate trust tax return.

This post is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read on this site. Using this site or communicating with Rabalais Estate Planning, LLC, through this site does not form an attorney/client relationship.

Paul Rabalais
Louisiana Estate Planning Attorney
Phone: (225) 329-2450