Must Small Irrevocable Trust File Tax Return and Issue K-1s?
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Question:
Dad died in 2021 in Florida. He was the grantor of a revocable trust and I (daughter) was the trustee. My understanding is that upon his death, it became an irrevocable trust. When he died (no longer the trust’s grantor) I applied for an EIN for the trust and now I’m the only trustee. Did the trust go back to being revocable or still irrevocable? Dad’s trust documents indicated the beneficiaries and disbursement amounts and those were carried out per instructions (all trust funds totaled less than $75K–no other items/assets but cash in the trust). Do those individual disbursements get recorded via a 1041 and K-1s such that each beneficiary now has to pay tax on that “income” from the trust? The trust was closed upon disbursement of the monies in the trust and all occurred before the end of 2021.
Response:
You did perfectly right. The trust file a first and final 1041 tax return for the trust to let the IRS know it’s been closed out. It seems quite unlikely that it will have to issue K-1s to the beneficiaries since it only needs to do so if there was net income to the trust after payment of costs, such as legal and accounting fees. The only income would be dividends and interest, which probably were non-existent or quite small given the size of the trust, its short duration as an irrevocable trust, and the current low interest rates. Distributions of principal are not considered income to the beneficiaries and do not need to be reported to the IRS. If the trust were larger and had realized income, the K-1s would report such income as passing through to the beneficiaries on a pro rata basis, with each beneficiary reporting his or her share of the income on his or her tax return.
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Hi Harry
My husband died and left me an irrévocable marital trust. It only stock in it. I ask my advisor to distribute all the dividends to me by Dec 31 st. Usually the amount of dividends given to me is about $37,000. But there seems to always have a couple of hundred left in trust. I have to spend $800 or more To do trust tax return.
Is there away to avoid doing tax return each year?
No, you really need to do a tax return for the trust each year even though it will probably never have to pay any taxes. The income will be reported as coming to the trust’s tax identification number and it must file the return to take the deduction for the distribution to you. Then you will receive a K-1 which you have to report on your individual return. That way, you’re taxed on the income rather than the trust, probably at a lower rate.