Trusts and Federal Income Taxes: Part 1 of 3
Jan 14, 2012 / By: Geoffrey H. Garrett, Estate Planning Attorney / Category: Estate Planning, Financial Planning, Taxes, Wills and TrustsThe Internal Revenue Service (IRS) uses special tax rules for trusts. Understanding these tax rules is imperative for estate planning attorneys. According to the IRS, a trust established under state law must comply with the federal tax laws regarding tax liabilities of trusts. By creating a trust, the owner or grantor of the trust appoints a trustee to become a fiduciary of the trust instrument. A trustee retains legal ownership to administer the assets on behalf of the grantor for the benefit of the trust and its beneficiaries. The written trust document must clearly state the beneficiaries of the trust and appoint a trustee. A trust must also have trust property or assets within the trust. The IRS requires that all trustees or grantors file annual tax returns during tax years in which the trust includes at least $600 of trust assets or income and during each year a beneficiary named in the trust is a nonresident alien.
In limited situations, some trusts are never required to file tax returns. The trust tax return is IRS Form 1041, U.S. Income Tax Return for Estates and Trusts. Contrary to popular belief, an individual cannot impute his tax liabilities to a trust for federal income tax purposes. Because the IRS prohibits assignments of income, individuals are still liable for their income taxes even where their incomes go directly to their trusts.
Byrd : Garrett, PLLC is a member of the American Academy of Estate Planning Attorneys.
Tags: Financial Planning, Taxes, trusts
