By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold, NJ Trust and Estates Attorney
A grantor (a grantor is the creator of a trust when alive) pays taxes on any trust profits and gain, but when the Grantor dies, the beneficiaries are responsible to pay the tax on any taxable trust gain and distributions. The Internal Revenue Service insists on distinguishing between pre-death and after death income and distributions. A tax ID number allows the IRS to distinguish between the grantor’s final income tax return and the affairs of the trust.
A grantor trust is also a type of trust. The grantor creates the trust and is allowed to amend or revoke the trust at any time. The grantor manages the assets of the trust, similar to the way an individual manages his own income and assets. A grantor names the beneficiaries who will receive trust assets, and because the trust is revocable, the grantor can change beneficiaries, the trustee(s) and asset assignments whenever he or she wishes.
Grantor Trust Tax Reporting
The income and assets of most grantor trusts are reported on the individual tax return of the grantor. The IRS does not require grantors to obtain a separate Employer Identification Number for a revocable trust because all trust activity is reported under the grantor’s Social Security number. However, a grantor trust can apply for a tax ID. If a grantor decides to do this, the activities of the trust must be reported on IRS Form 1041, instead of on the grantor’s 1040 form. Applying for a trust EIN number doesn’t change the trust structure. If the trust is a revocable trust then upon receipt of the EIN, it will remain a revocable trust until the grantor dies. Although a tax IT is not required, a grantor may find it easier to separate the trust assets and activities from his or her own tax reporting. Others may find separation cumbersome and choose not to obtain the EIN before its necessary. A grantor is required to pay the tax on any trust income regardless of whether activities are reported on his or her personal return or on the separate 1041 form until he/she dies.
When a grantor dies, the trust automatically becomes irrevocable, which means no more changes and revocations to the trust are allowed. Because the grantor is not able to make decisions regarding the trust, (they’ve died) trust activity can no longer be reported on the grantor’s individual tax return and the IRS requires an irrevocable trust to have its own tax ID number. All irrevocable trusts throughout the United States must have an EIN number for tax reporting purposes. If the grantor obtains an EIN for the trust before he dies, you’ll still need a new EIN for the trust once it becomes irrevocable. The IRS doesn’t give a time limit for applying for the new EIN, but you should get one as soon as possible, as you’ll need it to report trust activities to the IRS. The first tax return for the irrevocable trust is due on the 15th day of the 4th month following the close of the trust’s tax year. The calendar year method is the default tax year for trusts, which ends on Dec. 31.
Tax ID Applications
The IRS makes it convenient for trusts to apply for an EIN and offers online, phone and mail-in applications. The online method is the quickest, and shows the EIN number for the trust immediately after the application is submitted. Visit the irs.gov website for the online application. Phone applications are accepted Monday through Friday at 800-829-4933, between 7 a.m. and 7 p.m. local time. If you wish to mail the application, use IRS Form SS-4 and send it to the address listed in the form instructions. After the grantor dies, only the appointed trustee or fiduciary can apply for the EIN.
To discuss your NJ Trust and Estate matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at firstname.lastname@example.org. Please ask us about our video conferencing consultations if you are unable to come to our office.