How Are Revocable and Irrevocable Trusts Taxed?

 In Revocable Trusts, Trustee

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For the most part, trusts don’t pay taxes on their income, instead passing the income through to the trust beneficiaries. But when they do pay taxes, the tax rates are often higher than those for individual taxpayers. Here’s how this works.

Revocable Trusts

If you are the trustee of your own revocable trust, you use your own Social Security number for your accounts and report the trust income just like your own. If you are not the trustee, some tax specialists advise that the trust should have its own tax identification number (sometimes referred to as an 04 number), but few trustees take this step, since even if they did, the trust grantor would pay taxes on any income.

Irrevocable Trusts

All irrevocable trusts must obtain their own tax ID number and file their own 1041 tax return to report any income earned. Irrevocable trusts are divided into two types for tax purposes—grantor trusts and non-grantor trusts. Grantor trusts are those in which the creator of the trust—the grantor—retains significant benefits or rights, such as the right to receive all the trust income or change trustees. Grantor trusts file their own informational returns, reporting the trust income, but do not pay any income tax. Instead, they issue a k-1 form to the grantor, akin to a 1099, telling the grantor how much to report on her tax return. (There are arguments that some grantor trusts do not need their own tax ID number or have to file a return, but the standard practice is to do so with all irrevocable trusts.)

Non-grantor trusts, those in which the grantor does not retain significant rights or benefits, still often do not pay income taxes. Like grantor trusts, they must file an annual 1041 tax return, but they only deduct income actually distributed to or used on behalf of any beneficiaries. To the extent they do distribute income, they issue k-1s to the beneficiaries who received the income, who must report it on their income tax returns, whether or not they are the grantor of the trust. The trust then pays taxes on any undistributed income.

By way of example, let’s assume that a trust earns $10,000 in interest and dividends in a year and distributes $1,000 each to five beneficiaries. It will report the full $10,000 of income on its tax return, but deduct the $5,000 it distributed, paying taxes on the remaining $5,000 of income (less certain deductions). It will issue five k-1s, one each to the five beneficiaries, reporting the $1,000 each that they received.

Trust Tax Rates

Trust tax rates follow similar rates to those paid by individuals, but reach those rates at much lower thresholds. Here are the rates and thresholds for 2020:

Taxable Income            Tax Rate

$0 – $2,600                         10%

$2,601 – $9,450                  24%

$9,541 – $12,950                35%

$12,951 and above             37%

As you can see, trusts reach the top rate at just under $13,000 of income. Except for the best heeled trust beneficiaries, their own marginal rates are likely to be much lower, since individuals need more than $500,000 of income and married couples more than $600,000 of income to reach this rate. This means that trusts can usually save taxes by distributing all but minimal income to beneficiaries. Of course, taxes paid is only one consideration in determining whether it’s appropriate to make distributions.

Related Articles

What are the Tax Implications of Owning Property in Nominee Realty Trusts?

Tax Implications for Growth of Life Interest in Real Estate in Trust

How Are My Trust Distributions Taxed?

 

Showing 58 comments
  • Elvis
    Reply

    If an irrevocable Trust is formed in FL (settlor residing in NY grants money into the FL trust and to the trustee, who is a FL resident), and if the trust is a non-grantor trust (settlor gives up all rights & claims to the money given to the trust, and cannot alter or amend the trust in any way)….. are the trust taxes paid federal and Florida income taxes or federal and NY state income taxes? Thank you for your thoughts and insights.

      • Harry Margolis
        Reply

        Elvis,
        I believe the trust would be taxed in Florida and not in New York since it’s only New York connection would be the residence of the grantor. He or she should be sure to file a gift tax return as further evidence of intent to give up all control.

      • Victoria
        Reply

        A Revocable Grantor Trust set up by a parent became an irrevocable trust when the parent died, in 2020. The two surviving children are were co trustees with with grantor and are now co-trustees of the trust which now has it’s own EIN. The trust, when all properties are liquidated will have a value close to $1,000,000. These properties, because of the currant situation, will not be liquidated until the trustees can safely travel. The trust has income from one rental property, and increases in investments. Is it a correct understanding it will be liable for 37% of this income assuming it is over $12,951? The trustee’s however, would not have a tax liability? We are trying to budget accordingly.

          • Harry Margolis
            Reply

            Victoria,
            The trust must report the rental income, but it may or may not have to pay any taxes. First, it can deduct any expenses attributable to the rental properties. Second, it can deduct trust expenses, such as trustee fees and legal or accounting fees. Finally, third, to the extent the income is distributed to the beneficiaries, such distributions can also be deducted. In this case, the trust would issue k-1s to the beneficiaries and they would report the income on their returns and pay taxes at their marginal rates.

          • Kris
            Reply

            My wife has a irrevocable trust with around 30k in it. We are hoping to pull 25k out of it to help with the construction of our new house. What would be the tax implications of such a action? Thanks.

              • Harry Margolis
                Reply

                Kris,
                It depends on how the $30k is invested. If it’s in a money market account, there would be no tax consequences. If it’s in appreciated stock that has to be sold, doing so would trigger the realization of capital gains and a tax on those gains. In all likelihood whatever tax liability there may be would have to be paid by your wife rather than the trust, since the trust could take a deduction for the distribution.

              • Randi
                Reply

                Hi Harry,
                I love your website, by the way!
                I have a question that is the opposite of Elvis’s above.
                We have an Irrevocable Trust for dad. It was signed/formed in NY 2019, with a Tax ID, after he became incapacitated from a brain tumor. At the time dad was a resident of NY. Dad had two homes, one in NY – owned by the trust and one in FL – not owned by the trust. We have sold both homes and now dad is a FL resident in an assisted living facility. I am the healthcare proxy. I live in FL and my brother is the POA and Trustee who lives in NY. We are both equal beneficiaries.
                The question is, if dad is now a FL resident and the trust was formed in NY, with the POA and Trustee residing in NY, do we need to file NYS taxes. This is a non-income producing trust, but there may be some income this year since we have to change all the investments (it was not properly invested). Do you recommend we have an addendum to the Trust to change the address to FL? Can the Trustee and POA reside in NY with dad as a FL resident? How does this affect the trust and taxes? Thank you in advance for your response.

                • Randi
                  Reply

                  I forgot to add, it is a Grantor’s Trust. 🙂

                    • Harry Margolis
                      Reply

                      Randi,
                      Thank you for your comment.
                      Your addendum that this is a grantor trust is very important. It means that all the trust income should pass through to your father and should be taxed to him based on his residence. Upon your father’s death, however, the trust will no longer be a grantor trust and will probably have to pay taxes in New York in part due to your brother’s residence there. I’m not sure whether changing the trust’s jurisdiction to Florida would change that given the strong nexus with New York.
                      To be absolutely certain about all the above, I’d consult with an accountant or tax attorney in New York.
                      Harry

                        • Randi Glazer
                          Reply

                          Hi Harry!
                          Thank you for responding and for confirming the state income tax is based on dad’s residence. Just to make this a little more interesting, my brother and I have inheritance trusts set up for each of us (50/50) upon dad’s passing. We hope that won’t be for quite a while. Once the assets are split between us, my brother would need to pay any NYS taxes after the step up basis, if he is still a NYS resident?

                          By the way, I read your sample chapter on ‘Durable Power of Attorney’. Excellent advice! The Case Study you site about the accountant is very similar to what happened with dad. I shared it with my brother. We are so grateful dad had a Durable POA and Health Care Proxy in place for us. NYS was going to start Guardianship until we advised we had taken care of everything. Ironically, we had the trust was set up 24 hours before they hospital was going to do start the process.

                          I have told many friends my age to make sure their parents have a POA, Health Care Proxy and will in place; for disability, not just for death. We’ve put all these in place for ourselves, as well. Dad having Long Term Care Insurance (LTCI) has been a life saver. I encouraged my in laws to buy this and they were able to convert their Life Insurance into a LTCI policy. 🙂

                            • Harry Margolis
                              Reply

                              Randi,
                              All great advice. Everyone should have a durable power of attorney and health care directive. I’m also a big proponent of revocable trusts for asset management. Those who can afford to, should also consider buying long-term care insurance.
                              With respect to your father’s grantor trust, your brother in New York would have to pay any New York State taxes due on income from the trust as well as capital gains, though the latter should be minimal given the step-up in basis upon your father’s death.

                        • sree srch
                          Reply

                          I have ILIT where I gift some amount every year much less than gift limit. Will the Gift amount become income for ILIT trust for IRS purpose tax filing?

                            • Harry Margolis
                              Reply

                              Sree,
                              No, gifts are never considered income to the recipient. However, remember to provide the beneficiary or beneficiaries of the ILIT a Crummey letter whenever you transfer funds to the trust. It’s the Crummey letter that qualifies the gifts for the $15,000 gift tax exclusion. Without the letters, each contribution is a taxable gift.

                            • Larry Olson
                              Reply

                              Hi Harry,

                              Great advice and info!
                              Is there any reason that I can’t have an irrevocable trust that is owned by my Roth IRA? Would that asset be taxable to my kid at the time I give it to her (as beneficiary)?

                                • Harry Margolis
                                  Reply

                                  Larry,
                                  I actually don’t know a lot about Roth IRAs, partly because they haven’t come up in my practice and partly because I’m not a great fan. They seem like one more financial product to complicate our lives. That all said, I don’t know of any reason an irrevocable trust can’t own a Roth IRA (rather than the Roth IRA owning the trust).

                                • Chris Androulakis
                                  Reply

                                  If a irrevocable trust is created 1/1/2021 and a property in that trust is sold 1 year later, how would the cost basis be calculated on that property for capital gains? Does it use the value of the house when put into the trust or the value of the house when it was originally purchased 50yrs ago?

                                  If it uses the 50yr cost basis, i assume the 250k/500k exception cant be used anymore since its no longer owned by my parents?

                                    • Harry Margolis
                                      Reply

                                      Chris,
                                      Assuming the grantor of the trust does not die before the property is sold, the house will have the same basis as it had when it was transferred into the trust, its purchase price from 50 years ago plus the value of any improvements. If the grantor dies before the house is sold, it might receive a step-up in basis depending on how the trust is written. In terms of taking the homeowner’s exclusion, that too depends on how the trust is written. If it’s a grantor trust with respect to both income and principle, it can qualify for the capital gains exclusion, but the trust has to be specifically written for this purpose, which sometimes can undermine other purposes of trusts.

                                    • Donna M Lynne
                                      Reply

                                      Sorry if I got70,000 in trust bank account and got 60$ interest. Do I claim anything. Just that an life insurance policies irrevocable trust three children never took anything out

                                        • Harry Margolis
                                          Reply

                                          Donna,
                                          I’m not sure if I totally understand, but it sounds like you received $70,000 of which $60 was interest. If that’s the case, you would report the $60 on your income tax return, but not the $70,000. But please clarify whether this is the situation and your question.

                                        • Donna M Lynne
                                          Reply

                                          I have insurance policies in my irrevocable trust. I also started a bank account of $60,000 irrevocable trust. Can I add to the bank??? Being I don’t own the trust anymore .Do my beneficiaries get the money tax free ? Nothing has been distributed. Does trustee just follow the will?? Do you have to report it to anyone I know it does not go through probate.

                                          • Donna M Lynne
                                            Reply

                                            Should I name irrevocable trust as beneficiary of my savings and checking account?

                                            In which my children are in the trust. Or name separate beneficiaries on saving and checking? Which would still be my children?? Once in trust I know life insurance policy are tax free. Do they fill out a form for trust.
                                            Or individual when money is received. This does not go there probate correct? Just follow the wishes of trust?

                                            • Sonia
                                              Reply

                                              Hi Harry – great info.
                                              I have a quick question about tax filing and revocable trust if it does not distribute anything to anyone. For example, a revocable trust contains only stocks and receives dividends every year. If the trust does NOT distribute any money to anyone and retains all the dividends (can it do that?), whose tax return will the dividend income show up? The trust itself (the trust’s tax returns), or the trustee (personal tax returns)?
                                              Anyway to keep these dividends OFF of personal tax returns?

                                                • Harry Margolis
                                                  Reply

                                                  Sonia,
                                                  No, revocable trusts are always grantor trusts, meaning that the income is taxed to the grantor. The trust may or may not have its own tax ID number. If the grantor is a trustee, then revocable trusts generally use her Social Security number, but if other’s are trustees it may have it’s own tax ID number and have to file its own return. But even in that case, it pays no tax at the trust level. For tax purposes, all the income flows through to the taxpayer even if it’s not actually distributed and remains in the trust.

                                                • Sandy
                                                  Reply

                                                  Thank you for taking the time to answer questions!
                                                  If I have an irrevocable trust that is a non-grantor trust, and I don’t want the trust to be taxed with income, do I need to distribute all income to myself before year end to make sure the income is taxed at my income tax rate? Or can I wait until next year tax return filing to distribute trust income?

                                                    • Harry Margolis
                                                      Reply

                                                      Sandy,
                                                      You’re in luck. Pursuant to I.R.C. Section 663(b) you have up to 65 days after the end of the year (until March 5th) to make distributions to beneficiaries and treat them as distributions made during the prior year. To have this treatment of such distributions, you must make the proper election on the trust tax return. I recommend working with an accountant on this.

                                                    • Howard Bass
                                                      Reply

                                                      My mother set up an irrevocable trust for me and my sister in New Jersey. It was funded with $144,000 on December 20, 2020 from an inheritance from the sale of a home. The lawyer who set it up said we need a Grantor Trust letter ($840 from him) while a CPA I checked with said that since the amount was under any estate and/or inheritance levels and the trust would not earn any income in 2020, the trust doesn’t need to file anything this year. The lawyer said the CPA is 100% wrong. I am neither a lawyer nor a CPA and don’t know who to believe.

                                                        • Harry Margolis
                                                          Reply

                                                          Howard,
                                                          I’d tend to agree with the CPA. While I’m sure I don’t have all the facts, it’s hard to believe the trust earned any taxable income during the last 10 days of the year. That said, you may be mixing apples and oranges here. It sounds like the CPA may be talking about estate and inheritance taxes and the attorney about income taxes. In that case, they could both be correct. I’d get back to the CPA and make sure that he or she understands that you’re talking about taxable income. Then I would do whatever the CPA recommends and retain him or her for future trust tax returns so that he or she is responsible for his or her advice.

                                                        • Howard Bass
                                                          Reply

                                                          Thanks. The interest rate is 0.01% is about a penny, if that much. The lawyer kept mentioning a “Grantor Letter,” which I didn’t think we’d need since the IRS doesn’t need to know about this until we have enough interest to file.

                                                          • Susan
                                                            Reply

                                                            Harry,
                                                            My siblings and I were advised to create a non-grantor irrevocable trust for my dad a few years ago, when we became incapable of managing his finances. Dad passed away in March 2020 and our elder lawyer filed a inheritance tax return with the state of PA within 9 months of his death (Dec. 2020). I was under the impression, and our tax advisor agrees, that an irrevocable trust “protected” the estate from paying this tax; hence, we don’t have to pay it. Can you comment on whether we should pay this tax or not? Thanks!

                                                              • Harry Margolis
                                                                Reply

                                                                Susan,
                                                                I really couldn’t say without seeing the trust, though it not being a grantor trust indicates that it probably was not in your father’s estate. One question is whether your father filed a gift tax return when he funded the trust. If so, that would guarantee that it’s not in his estate. It’s possible that you and your father are better off with the property being included in your father’s estate. If it consists of real estate or stock with substantial capital gains, the taxes you would save on the sale of the holdings may exceed any Pennsylvania estate tax you may have to pay.

                                                              • Paige
                                                                Reply

                                                                Hello! I am the Grantor initial trustee and one of the beneficiaries on a revocable property trust in NV. There is also a successor trustee which also holds the title of the second beneficiaries. I own 50% of the home, my successor trustee owns 50% of home.
                                                                My CPA and the person who drafted the trust recommended i get an EIN for the trust. Do I have to pay taxes on the trust yearly with an EIN? My CPA mentioned I would file a separate form (1041) for the trust and 1040 form for my personal taxes each year. With the 1041 she mentioned I would record any income, assets or expenses. Currently it is only expenses I just purchased the home in Oct 2020. In the next couple of years tho, I plan to make it an income property. I am thoroughly confused how this all works. Who will owe taxes on the trust? Is this a yearly thing that person would pay to IRS? Would I need to file taxes for the trust if use my personal ssn? any explanation would help. Not sure if I should use my personal SSN or an EIN. Thank you for your time!

                                                                  • Harry Margolis
                                                                    Reply

                                                                    Paige,
                                                                    I’m a little confused. Is the entire property held in the trust or just your 50% share? If it’s just your 50% share, I’d be inclined not to get an EIN for the trust since your half of the expenses and income will flow through to you in any case. On the other hand, if the trust holds the entire house and you will be splitting the net income with the successor trustee, then it probably does make sense to get an EIN and file an annual 1041 return for the trust. All the income and expenses will be reported on the trust return and then it will issue k-1s to you and your co-owner reflecting your shares of the net income. You can think of these like a 1099 you would get from a bank or investment company reporting your interest or dividend income. You would then report the net income on your personal tax returns. The trust itself would pay no tax.

                                                                  • Michelle
                                                                    Reply

                                                                    I am sole inheritor of a irrevocable trust holding a trust brokerage account and house. The house is excluded from reassessment by CA. The brokerage account was created and funded the day before the grantor passed away 09/26/20 (covid made everything last minute) and is payable-on-death. I am now the benefactor, sole trustee, and executor.
                                                                    I was going to move the brokerage funds ($190,000) to my own brokerage account to consolidate. The trust pays under it’s EIN anything over principal (hardly anything), minus distributions (none so far), correct? I will not be taxed for this transfer except any profit I make after transfer? Do I need to “gift” from the trust to myself to avoid it being income on my taxes? The house would be a distribution and deduction at the state’s former assessed value of $370,000, so would it be better to leave the brokerage account in the trust and profit as much as possible because of the house deduction? Once distributed, the trust will then have no assets within it and no tax filing is necessary after that?
                                                                    I think those are all the questions I could figure out to ask, and thank you kindly if you have any answers.

                                                                      • Harry Margolis
                                                                        Reply

                                                                        Michelle,
                                                                        Some of your questions are California specific, such as the local taxing authorities using the original purchase price of the property for assessing real estate taxes, rather than reassessing the value each year as is customary in the rest of the country. That’s a subject I’ve only heard about and can’t comment on.
                                                                        In terms of the brokerage account, the stock should all have received a step up in basis upon the grantor’s death, meaning you could sell the stock now or later only paying taxes on any gain accrued since then. You will not be taxed on a distribution of the brokerage account to you. In terms of any dividends or interest that may have been paid on the portfolio, any taxes on such income will be paid by the trust if they remain in the trust or by you if the income is distributed out to you.
                                                                        Finally, as you suggest, if you distribute out all the assets in the trust, you can file a final return for it and no further tax filing will be necessary.
                                                                        I hope this answers you questions.

                                                                      • Scott
                                                                        Reply

                                                                        Harry,

                                                                        I became the trustee of an irrevocable investment trust in 2020 of which I am also a beneficiary. The trust earned a a substantial amount in 2020. Should the trust pay me the maximum gift amount to help offset taxes? Thanks!

                                                                          • Harry Margolis
                                                                            Reply

                                                                            Scott,
                                                                            The $15,000 annual gift tax exclusion is probably irrelevant to the trust and distributions to you. What the trust may distribute to you is governed by the terms of the trust agreement and distributions to you will not be considered taxable gifts. However, they can affect the taxes paid on trust income. To the extent a trust retains earned income — dividends, interest and capital gains — it will pay taxes on the income at the trust tax rates. To the extent such income is distributed to beneficiaries, it will pass through to them and they will have to pay the taxes at their tax rates. Whether you might save some money by making distributions depends on your respective tax rates — yours and the trust’s. There’s a 65-day rule, which permits the income to be distributed until March 6th of the following calendar year for this purpose. In other words, you have until March 6, 2021, to make the distribution of 2020 trust income in order for it to pass through to you for tax purposes. Since the calculation of the optimal amount to distribute for this purpose is somewhat complicated (and includes a consideration of trust expenses, which are deductible), I recommend working with an accountant to determine the best approach.

                                                                          • Jan Bell
                                                                            Reply

                                                                            I am the trustee of a irrevocable trust left by my father to the benefit of my brother and me. We have $6500 qualified dividends in the trust this year that we don’t wish to distribute. How are those taxed to the trust? Is there a maximum amount on which there is 0% tax and then the rest at the normal rate for the trust?

                                                                              • Harry Margolis
                                                                                Reply

                                                                                Jan,
                                                                                Qualified dividends are taxed as capital gain rather than as ordinary income. For the 2020 tax year, the first $2,650 of capital gains earned by trusts are not taxed and there is a 15% tax rate for gains above this amount up to $13,150. is

                                                                              • Crystal
                                                                                Reply

                                                                                Can I name my daughter as the beneficiary and provide a language in the trust where she has the option to transfer the assets to her name or to a trust where she’s the grantor and beneficiary or just the beneficiary?

                                                                                Can I name a trust as my beneficiary?

                                                                                Can probate be avoided by creating testamentary trust in my revocable trust instead of a will in the state of California?

                                                                                  • Harry Margolis
                                                                                    Reply

                                                                                    Crystal,
                                                                                    You raise a few different questions and I’m not sure if you are talking just about trusts are also naming your daughter or a trust as beneficiary of other accounts, such as retirement accounts or life insurance. Just in case that’s your question, yes a trust can be a beneficiary of such accounts.
                                                                                    You can also name your daughter as the beneficiary of a trust. Presumably, you would be the beneficiary during your life and then she would be the beneficiary after your death. She can also be the trustee. Further, if you don’t use a trust and simply name your daughter as the beneficiary of an account, she then can create her own trust, but such a trust may not have all the same benefits in terms of creditor and divorce protection as a trust you created for her benefit.
                                                                                    Finally, yes, all states are the same in that you can use a trust to avoid probate. However, that would not be a “testamentary” trust. A “testamentary” trust is a trust in a will and therefore always involves probate.
                                                                                    I hope this clarifies things a bit.

                                                                                      • Crystal
                                                                                        Reply

                                                                                        Thank you for your response. Sorry for the confusion of my questions. I want to avoid probate by not creating testamentary trust in my will. I have minors who I want to leave my assets to but would want a trustee to manage the assets until my kids turn 25 or 30. So in order to avoid probate from having a trust in a will, can I create two trusts – one that is mine and the other one for my kids who are minor. I would name the minors’ trust as my beneficiary in my trust. Is that allowed? Or my other option would be keeping the assets in my trust with a trustee managing it and distributing the assets to my kids once they reach the age of 25 or 30? Would this option avoid me from having to create a kids trust because the instructions are in my trust? Please let me know your recommendations. Thank you!

                                                                                          • Harry Margolis
                                                                                            Reply

                                                                                            Crystal,
                                                                                            Thank you for clarifying your question. The standard approach is to include everything in one trust which would be for your benefit during your life and then for your children if at the time of your death they are both still under age 30. Often these trusts keep everything as a single fund until the youngest reaches age 25 and then splits into two shares until age 30. That way neither gets charged in effect for his or her greater needs before age 25, but does for choices made after that age. But it would be up to you how to structure that.

                                                                                      • Crystal
                                                                                        Reply

                                                                                        Thank you for your response. Sorry for the confusion of my questions. I want to avoid probate by not creating testamentary trust in my will. I have minors who I want to leave my assets to but would want a trustee to manage the assets until my kids turn 25 or 30. So in order to avoid probate from having a trust in a will, can I create two trusts – one that is mine and the other one for my kids who are minor. I would name the minors’ trust as my beneficiary in my trust. Is that allowed? Or my other option would be keeping the assets in my trust with a trustee managing it and distributing the assets to my kids once they reach the age of 25 or 30? Would this option avoid me from having to create a kids trust because the instructions are in my trust? Please let me know your recommendations. Thank you!

                                                                                        • Richard Gregg
                                                                                          Reply

                                                                                          How does a non-grantor irrevocable trust whose only income is pass through and not actually received by the trust pay taxes on that income? We are interested in pursuing this to personally avoid tax liability. It is only “phantom income” to us. Hope that makes sense. Thank you.

                                                                                            • Harry Margolis
                                                                                              Reply

                                                                                              Gregg,
                                                                                              Typically, if the trust is a non-grantor trust, it will pay tax on income it retains, but pass through the income for any it distributes. So, the short answer is to retain the income in the trust. To be honest, I don’t know if it’s possible to treat the income as retained and any distributions as distributions of principal. Taxpayers usually don’t prefer that option, since with the accelerated tax rates for trusts, the taxes are usually higher if they’re paid at the trust level. But the situation may be different if the trust income is relatively low and the beneficiaries are in a high tax bracket. An accountant could tell you whether that alternative treatment is available even when the trust is making distributions.

                                                                                            • Richard Gregg
                                                                                              Reply

                                                                                              Thank you. We didn’t quite connect on question and answer but still was a helpful reply. Thanks for fielding all questions.

                                                                                              • Javier E
                                                                                                Reply

                                                                                                Hi Harry,

                                                                                                My mother passed away on September 5, 2020 and she had a revocable trust with the only asset being the house. We didn’t sell the house until March 18, 2021 which is just past the 6 months. The valuation on the house on the date of her death was 530k and the house sold for 575k. The money is to be divided amongst me and my siblings equally (10 of us). Do I need to file a 1041? Do I need to file a 706? Will her estate need to pay taxes on the appreciation of her house?

                                                                                                  • Harry Margolis
                                                                                                    Reply

                                                                                                    Javier,
                                                                                                    First, you do not have to file a 706 because your mother’s estate is well below the $11.18 estate tax threshold in place in 2020.
                                                                                                    Second, you do need to file a 1041 income tax return for the trust for 2021. However, the trust itself will not have to pay any tax because any taxable income or capital gains will pass through to the beneficiaries (assuming you distribute the proceeds before the end of the year).
                                                                                                    The third question is more difficult. You have a valuation of the house as of the date of your mother’s death which is $45,000 less than what you sold it for. The question is whether you and your siblings will have to report this $45,000 difference as gain ($4,500 each). I think it comes down to whether you think the value of the house did increase this much since September. The best way to determine the fair market value of property is to put it in on the market and see what it will get. This is what you did. So one argument is that the sale price is a better indication of the value on the date of your mother’s death than the valuation you obtained. However, six months passed between the two. So it’s also possible that the valuation was accurate and the market changed in the interim.
                                                                                                    You know the market where the house is located, so I would recommend going with what you feel is accurate. If you think the market was flat, then use the sales price for the basis in the property, in which case there would be no gain. If you feel the market has been appreciating, then use the valuation and report the $45,000 of gain.

                                                                                                  • Lisa
                                                                                                    Reply

                                                                                                    Hi Harry!
                                                                                                    My mom passed away in April 2020. Her trust was in her name and the income was all in an account with a major investment firm and filed under her social on her tax return each year. Per the terms of the trust, each of her grandkids were given $50K that they cannot access until they are 30. Very shortly after her death, the money was put in separate trusts for each grandchild and the trusts have an EIN that is not their social. The balance is in an account with it’s own EIN now. All funds are still in accounts with a major investment firm and all income is reported on a separate 1099 for each. Does a K-1 need to be generated? Or can we just file a 1041 for each of the grandkids’ trusts using the info on the 1099? And another 1041 for the trust with the balance?

                                                                                                      • Harry Margolis
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                                                                                                        Lisa,
                                                                                                        Since no distributions have been made, no K-1s should be issued to the grandchildren. Unfortunately, each trust account will need to file its own 1041, since they each have a separate EIN. However, any of the accounts that generate income of less than $600 during the calendar year do not have to file a return.

                                                                                                      • Brian
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                                                                                                        Hi Harry,

                                                                                                        Irrevocable grantor trust question. The trust was created in New York. Holds investments and generates investment income. The trustee lives in New York but the grantor moved to California (full year in 2020). Is the investment income now only subject to California tax or is it still New York taxable income?

                                                                                                        Thanks!

                                                                                                          • Harry Margolis
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                                                                                                            Brian,
                                                                                                            I’m sorry, I don’t know for sure, but I think that because it’s a grantor trust it should only be taxed in California. If it were not a grantor trust, then I’d think it would have to file a New York return, but that’s not the case. I’d suggest consulting with a New York accountant, but judging by your email address, it looks like you’re an accountant, perhaps in California. In any case, this is my best guess.

                                                                                                          • Jan
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                                                                                                            My dad has 17 properties that he is leaving his three children. Right now, he has a regular will. As the executor, I am wondering if it is in our best interest, timewise, to create a revocable trust so that we can avoid probate and transfer the properties to the kids ASAP. I am worried about the tax implications. Dad is single and living with me. What is the best way for me to calculate the difference in what taxes will cost me?

                                                                                                              • Harry Margolis
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                                                                                                                Jan,

                                                                                                                Given your father’s property, I strongly recommend that you engage a local estate planning attorney and perhaps a real estate attorney as well. You probably do not want to transfer the property to yourself and your siblings now because that would mean a loss of step-up in basis, the tax consequences of which could exceed any estate tax. But that may depend on the state in which you live as well as whether the total value of your father’s property exceeds $6 million, which more or less will be the federal estate tax threshold starting in 2026 (if not lowered by a change in the tax code). As you suggest, a revocable trust may well make sense for a number of reasons, including probate avoidance and to provide for management. You may want to consider LLCs as well for both management and liability protection purposes.

                                                                                                              • Sylvia B
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                                                                                                                I am a trustee of an irrevocable living trust. Both my parents have passed away. The trust is for a 2 family house in NY valued at one million dollars. My disabled brother lives in the house rent free and the other apartment is not rented. He doesn’t pay the property taxes, I’ve been paying them, but I can’t afford to pay them much longer. I wanted to sell the house and buy a smaller house for him to live in, but my brother (being mentally challenged) won’t even discuss it. He is adamant about staying in that house. If, in the future, the house goes into foreclosure due to delinquent property taxes, and the government puts a lien on the NY house, can the government also put a lien on my house in Florida? My house in Florida is not part of the trust. Thank you

                                                                                                                  • Harry Margolis
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                                                                                                                    Sylvia,
                                                                                                                    That sounds like a very difficult situation. You have the legal right to rent out the apartment or evict your brother if he won’t cooperate but, of course, that’s a difficult step to take. To answer your question, you are not personally liable for the trust’s debts, so our house in Florida is not at risk. However, I would advise you to resign as trustee and appoint a professional trustee to take your place. Your brother has put you in an untenable situation. A professional trustee — a lawyer, trust company or bank — would be more comfortable taking whatever steps are necessary to properly manage the trust for the benefit of all beneficiaries. Any cost in terms of trustee fees would be more than made up for in terms of savings on the potential loss of the house.

                                                                                                                  • Joseph S
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                                                                                                                    My mom established a revocable trust in 2018. She funded her trust with two real estate properties and had the respective land titles recorded as “*Mom’s Full Name* Revocable Trust” (I’m not stating her full name here). Mom recently died. I am her trustee. My mom’s law firm says this is now an irrevocable trust since the grantor died. Yet, their advice is that I apply for an EIN from the IRS and call it a revocable trust, so it lines up with the property records. My accountant says the EIN from the IRS must be characterized as an irrevocable trust. I got the EIN from the accountant and established the *Irrevocable* trust bank account. Here’s the problem: the property is still titled as “*Mom’s Full Name* Revocable Trust.” When I sell the property and get to closing, the check will be made out to the Revocable trust, with me as Trustee. My bank will not accept any deposits made out to the Revocable trust. Who is screwing up here: my lawyer, my accountant, my bank or me?

                                                                                                                      • Harry Margolis
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                                                                                                                        Joseph,
                                                                                                                        This is a common situation which often creates the confusion you are facing. Typically, revocable trusts become irrevocable upon the death of the grantor because only the grantor has the right to revoke or amend the trust. Yet, the change of character from revocable to irrevocable does not change the name of the trust. Because of the confusion this causes, in our office we have stopped using the word “revocable” in the names of the trusts we draft for our clients. In your case, the bank account should have been in the name of the “revocable” trust even though the trust is now irrevocable. The title doesn’t really mean much. It’s the terms of the trust that control. If you do in fact run into trouble depositing the proceeds of the house sale, I’d recommend changing the name of the bank account.

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