I hope someone can help: Three years ago,in 2010, as the result of divorce, I was given money from the sale of the marital home. In order to dedicate that money to my chidlren's future, I created a revocable trust at that time.
Details of the trust:
I am the GRANTOR
My sister is the TRUSTEE
The Trust has it's own EIN
The money has not increased in value, nor has it decreased in value. There has been no income or loss. Based on an accountant's advice, I have never filed a form 1041, but the more research I do, the more worried I become that I have done something wrong by not filing. Am I in danger of IRS penalties? Should I go back and file retroactively? Please advise.
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How you report the income / deductions earned by a trust depends, first, upon whether the trust is treated as a grantor trust for income tax purposes. A grantor trust is "a legal trust under applicable state law that is not recognized as a separate taxable entity for income tax purposes because the grantor or other substantial owners have not relinquished complete dominion and control over the trust." See page 12 of Form 1041 Instructions.
Generally, when the grantor of a revocable trust retains the right to amend the trust, or terminate the trust, or control the beneficial enjoyment of the trust property (i.e., as the trustee), then the trust is deemed to be a grantor trust. The reasoning is that, if the grantor retains any of those powers, then the grantor is still considered the owner of the trust assets and, therefore, should be taxed on any income earned by those assets.
If a trust is deemed to be a grantor trust, then the trust is disregarded for income tax purposes and the grantor is required to report the trust income and deductions on the grantor's personal income tax return (form 1040). However, the reporting of the income and deductions for the trust varies, depending upon whether the grantor is the sole trustee or not.
If the grantor is the sole trustee, then the grantor uses his/her own social security number for trust investments, and all income and deductions of the trust are reported directly on the grantor's personal income tax return. In that case, the trust does not file any income tax returns, including form 1041.
If the grantor is not the sole trustee (as in your case), then the trust is required (1) to obtain its own tax id (EIN) and (2) to file its own tax return (form 1041) each year. However, because the trust is a grantor trust, special reporting requirements apply.
For example, as a grantor trust with someone other than the grantor as a trustee, the trust is required to file an income tax return (form 1041) each year. However, the trust's tax return is only an informational return; i.e., the trust fills in only the entity information of Form 1041. It does not show any dollar amounts on the form itself. Instead, an attachment to the form 1041 is used to show the income and deductions of the trust. In addition, because the form 1041 is only for informational purposes for use by the IRS, there is no need to use Schedule K-1s to report income distributions to beneficiaries. That's because the grantor will be given a copy of the informational return, together with the attachment showing income and deductions of the trust, and will report that income and deductions on the grantor's personal income tax return (form 1040).
It's important to understand that a grantor is required to report all income (and deductions) of the trust on his or her personal income tax return each year, whether the grantor is the sole trustee or not. However, if someone other than the grantor is serving as a trustee, then the IRS requires the trust to file an information return so that the IRS knows that the trust is a grantor trust with the income being reported by the grantor rather than the trust itself.
Finally, if the trust is not a grantor trust (i.e., the grantor is not treated as the owner of the trust), then the trust is required to file its own income tax return (form 1041) if it has (1) any taxable income, (2) gross income of $600 for the year (regardless of taxable income) or (3) any beneficiary is a nonresident alien.
In your case, Janetta, your trust would be treated as a grantor trust simply because it is revocable by you during your lifetime. Because your sister is the trustee, the trust would be required to file an information return each year (form 1041) as explained above, and you would report all income of the trust on your personal income tax return each year (form 1040). That has to be done each year regardless of the amount of income earned by the trust.
You have indicated that the trust has had no income and that the value of the trust has not increased or decreased in value. I don't know how that could be since you indicated that you transferred money to the trust from the sale of the marital home. That money must have been invested somehow, somewhere. And, it must have earned income in the process. That income must be reported on the trust's informational return (attached sheet) and on your personal income tax return (form 1040).
I trust this helps somewhat. For further information on the reporting requirements, please see the IRS' Instructions for Form 1041.
Last Edit: 1 year 5 months ago by Michael P. Pancheri.
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