Did you know that you need to pay taxes on income from your trust? Have you? When dealing with a trust, a whole new set of taxation issues come into play and you may need help navigating the new tax issues you’re faced with. Income from your trust is always paid either to the beneficiary or accumulated within the trust itself. The grantor is the person who puts assets into the trust. The grantor and beneficiary can also be the same person.
The most common type of trust formed to avoid probate are revocable living trusts. These types of trusts are always grantor trusts. The tax identification number of that type of a grantor trust is usually the grantor’s own social security number. If that’s the case, all income is reported on the grantor’s Form 1040. There are also various types of grantor trusts that use a different tax identification number from the grantor’s social security number. Regardless of its type, if income is retained in the trust or otherwise not reported on the grantor/beneficiary’s Form 1040, then the trust must file a Form 1041, possibly paying a higher tax rate on the income than would be assessed upon the individual’s Form 1040 return.
If the grantor is not the beneficiary, then the trust may be simple or complex. A simple trust mandates payment of all income earned by the trust, at least yearly, to defined beneficiaries. A complex trust does not mandate payment of income and may allow for payments to non-beneficiaries, such as charities. A trust’s status as simple or complex can change yearly, depending on the actual facts, such as whether the trust generated any earnings.
Whether simple or complex, the income paid to a beneficiary is taxed to such beneficiary at his/her tax bracket. Taxes related to income retained by a complex trust is paid by the trust. When a trust retains income, it pays taxes at a steeper bracket than individuals. That federal bracket is 39.6% once $7,500 is retained by the trust entity. Complex trusts, whether the trust income is entirely paid to the beneficiary or not, must file a Form 1041 for any year where income exceeds $600.
We can help you make sure you’re filing all of the correct IRS forms for any type of trust. Contact Matlin Law Group today to speak with a knowledgeable trust taxation attorney.
What Our Chicago Clients Are Saying About Us
Eric and Julie: On behalf of the Edgebrook Women's Club would like to thank you and express our gratitude for your wonderfully informative presentation to our group. As was evident from the many questions your information was needed, very well received and your situational examples registered with many in the audience. Thank you again for providing a much needed and informative presentation.
"Eric, Thanks again for helping me get this signed and completed. It's a big comfort knowing that my will and estate is in order. Thank you again for your generosity and friendship. I really appreciate being able to get this taken care of and with a certain level of confidence. I trust you and feel really comfortable with your advice. I've already referred some friends to you. I will continue to be your advocate and biggest fan!"
"We felt very comfortable with both attorneys. We would feel comfortable if we had to call to have questions answered. The atmosphere with Mr. Matlin was great, and we left the office feeling positive about something that is so important to us."
"I believe Eric did an excellent job communicating the related issues, options and was very helpful in assisting in making final decisions. The process was very helpful and resulted in us making the right decisions for ourselves. It was very easy and educational to work with Eric Matlin and his team."
"There were areas that we had no idea how to handle. Eric Matlin always had a reasonable, often unique, solution. I would definitely recommend this firm."
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