A common question we get from clients is: What is the Tax ID number for my trust? The question is often prompted when our clients attempt to open an account under the name of their trust.
For most of our clients, the type of trust we create is known as a grantor trust which is amendable and revocable. These are commonly referred to as “living trusts”. You can determine whether you have such a trust by reading Article One of your trust document. In such cases, the Tax ID number for the trust is the trust creator’s Social Security Number. In the case of a joint trust created by two spouses, either spouse’s Social Security Number may be used. When it comes time to filing income tax returns, such persons file the IRS Form 1040.
For some of our clients, we use a different type of trust known as a non-grantor trust. These trusts are typically not amendable and irrevocable. In such cases, we obtain for the client from the IRS a separate Tax ID number. The income tax return associated with those types of trusts is the IRS Form 1041, commonly referred to as the Fiduciary Return.
These irrevocable trusts sometimes are used for high net worth clients whose estates may be exposed to estates taxes or in cases where the clients are pursuing strategies for qualifying for certain government benefits, such as veterans or Medi-Cal benefits. With estate tax exposure not generally being a problem with clients whose estates are under $11 million in 2019 (and double that amount for many married couples), use of such trusts for tax protection have become far less common. However, as our population ages, more and more clients seek benefits under programs available to provide veterans and Medi-Cal benefits.
Even with a grantor trust, aka, the living trust, there will likely come a time when the trust will need to get its own Tax ID number which is separate from the trust creator’s Social Security Number. This is when the trust creator has died. In most cases, a trust becomes irrevocable at that time and a new Tax ID number is required when it does.
That may not always be the case when a married couple have a joint trust and only one spouse dies. Depending on the provisions of the trust, the Tax ID number may simply be the Social Security Number of the surviving spouse or it may require the creation of two sub-trusts in which case typically one trust, the so-called Survivor’s Trust, continues to use the surviving spouse’s Social Security Number and the other trust, which may be known as the Family Trust, Bypass Trust, Decedent’s Trust, among other names, gets its own Tax ID number.
Persons serving as a trustee for another’s living trust are often at a loss about what to do when that trust creator dies. Since the trust will likely become irrevocable, the trustee must apply for a Federal Tax ID number unique to that trust. The decedent’s Social Security Number can no longer be used to report income from the trust as was done before their death. Instead, all income earned by the trust must be reported under a tax identification number. If an irrevocable trust earns more than $600 in income during the calendar year, the trustee will be required to file a 1041 tax return using the unique Federal Tax ID number. The Federal Tax ID number is also required to open a bank account under the trust name.
The trustee of the non-grantor irrevocable trust will be responsible for filing the Form 1041 until such time as all the assets in the trust have been distributed to the beneficiaries. At that time, assuming there has been sufficient income to file a Form 1041 during that last period, a Final 1041 return is filed.
In the face of the many significant and sophisticated responsibilities placed upon a trustee, it is generally prudent for the trustees to seek and obtain the advice and assistance from qualified experts, such as an estate administration attorney and accountant, as they carry their responsibilities. Such expenses are borne by the trust estate itself and not solely by the trustee.