law py
  • Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer
  • Home
  • Who We Are
    • About Our Firm
    • Attorney and Staff Profiles
    • About The American Academy
    • Advantages of Working With Our Firm
    • Speaker Connection
  • How We Help
    • Asset Protection & Business Planning
    • Elder Law & Medicaid Services
    • Estate and Gift Tax Figures
    • Estate Planning Services
    • Family-Owned Businesses & Farms
    • Incapacity Planning
    • IRA & Retirement Planning
    • Legacy Planning
    • LGBTQ Estate Planning
    • Minor Children & Young Adult Planning
    • Pet Planning
    • Remarriage and Blended Families
    • SECURE Act
    • Special Needs Planning
    • Trust Administration & Probate
  • Elder Law
    • Coping With Alzheimer’s
    • Hospice Care
    • Veteran’s Benefits
  • Resources
    • DocuBank
    • Elder Law Resources
      • Elder Law Reports
    • Estate Planning Resources
      • Estate Planning Checkup
      • Estate Planning Definitions
      • Estate Planning Reports
      • Incapacity Planning Definitions
      • Is Your Estate Plan Outdated?
      • Top 10 Estate and Legacy Planning Techniques
    • Frequently Asked Questions
      • Estate Planning FAQ’s
      • Frequently Asked Questions for Families Without an Estate Plan
      • Incapacity Planning FAQs
      • Legacy Wealth Planning FAQ’s
      • LGBTQ Estate Planning FAQ’s
      • Medicaid Planning FAQs
      • Probate FAQ’s
      • Trust Administration & Probate FAQ’s
      • Wills and Trusts FAQs
    • LGBTQ Resources
    • Special Needs Resources
    • Newsletters
    • Trust Administration & Probate Resources
      • Bereavement Resources
      • The Mourner’s Bill of Rights
      • Things You Need To Do When a Loved One Passes Away With a Trust
      • Things You Need To Do When a Loved One Passes Away With a Will
      • Trust Administration & Probate Definitions
  • Reviews
  • Contact Us
  • Attend a Free Webinar

Vitt Law Offices, PLC

Helping Other People Preserve Their Wealth

Attend A Free Webinar

Call Now
(434) 971-3025

header-logo
Home » Trusts and Income Tax: Who Pays?

Trusts and Income Tax: Who Pays?

May 31, 2012 by Vitt Law

Compliments of Our Law Firm,
By: The American Academy of Estate Planning Attorneys

Trusts are an incredibly useful estate planning tool, and they’re becoming ever more popular. But, as Trusts gain popularity, a question comes up more and more often: who pays the income tax on a Trust? It seems like a simple inquiry, but the answer can be hard to pin down. As a matter of fact, sometimes even lawyers don’t know.

So, who does pay the income tax on a Trust? Here is the answer, in a nutshell:

Grantor Trust

The first step in figuring out who is responsible for the income tax is to determine whether a Trust is a “grantor” Trust. The grantor is the person who created and funded the Trust, and a grantor Trust is one where the grantor has retained certain powers.

For instance, if you established a Trust and retained the power to substitute assets or to revoke the Trust, you have a grantor Trust. A grantor Trust is taxable to the grantor, whether or not any distributions were made from the Trust to the grantor during the tax year in question. In other words, if you have a grantor Trust, all the property in the Trust is treated as your property for income tax purposes. In fact, many grantor Trusts don’t even have their own tax identification number; instead, the income and expenses incurred by such Trusts are simply reported to the Internal Revenue Service under their grantor’s social security number.

Let’s look at an example:

James Smith creates the Smith trust, a grantor Trust. The Trust has $30,000 in income for the year and it distributes $10,000 to Ellen, who is not a grantor. The entire $30,000 is included on James’ tax return; Ellen does not include the distribution to her on her income tax return.

Non–Grantor Trust

Any Trust that is not a grantor Trust is classified as a “non-grantor” Trust. A non-grantor Trust is treated as a separate tax entity from the person who created it, and taxation of this type of Trust depends on the distributions made by the Trust in any given tax year.

Let’s take a fresh look at the previous example:

If the Smith trust were a non-grantor Trust and it had $30,000, with a $10,000 distribution to Ellen, three things would happen. First, the Trust itself would file its own income tax return – Form 1041—to report its income for the year. Second, the Trust would issue a K-1 Form to Ellen, alerting her that she had $10,000 in income in the form of a Trust distribution. Third, Ellen would report the Trust distribution as income on her own personal income tax return – Form 1040.

If you are the creator or the beneficiary of a Trust, it is vital that you know the tax rules that apply. Otherwise, you could be failing to report income that should be taxed to you – or you could be reporting income on which someone else should be paying income taxes. A qualified estate planning attorney can assess your situation and help make sure you’re playing by the right rules.

Primary Sidebar

DOWNLOAD OUR FREE ESTATE PLANNING WORKSHEET

There's a lot that goes into setting up a comprehensive estate plan, but with our FREE worksheet, you'll be one step closer to getting yourself and your family on the path to a secure and happy future.
Address
Texting Permission

SUBSCRIBE TO OUR E-NEWSLETTER

Address
Texting Permission

Where We Are

Vitt Law Offices, PLC
880-A Rio East Court
Charlottesville, VA 22901
Phone: (434) 971-3025

Map

OFFICE HOURS

Monday8:30 AM – 6:00 PM
Tuesday8:30 AM – 6:00 PM
Wednesday8:30 AM – 6:00 PM
Thursday8:30 AM – 6:00 PM
FridayClosed

Footer

  • About The Academy
  • Disclaimer
  • Privacy Policy
  • Sitemap
  • Contact Us
  • Facebook
  • LinkedIn
  • Twitter
Logo

Vitt Law Offices, PLC

© 2023 American Academy of Esate Planning Attorneys, Inc.

© 2023 American Academy of Esate Planning Attorneys, Inc.