After establishing a trust to simplify your assets and finances, it may move to the back of your mind as you worry about more immediate issues. However, when tax time arrives, you may wonder whether a tax return should be filed specifically for that trust or whether there are other tax issues to concern yourself with.The basic details provided below should better inform you about such matters.
Must You File a Tax Return for Your Trust?
Ultimately, the type of trust you've set up will dictate whether a tax return is something to complete. If, for example, you've arranged a revocable living trust, you won't need to move forward with a separate tax return for that entity. That's largely because you are administering and managing the trust; any income from the trust must be reported by you on your personal tax returns as supplemental income. Of course, you will pay taxes on that income.
If you should pass away, a revocable trust then becomes irrevocable and the trustee you've named is then responsible for taking charge of your trust. As such, they're indeed required to file a tax return if the trust's income for a year is above $600. Form 1041 is the required document.
If you originally set up an irrevocable trust, such a return should be done by the trustee as well, even while you're still alive. That's because assets in a trust are no longer technically yours; they belong to the trust.
What are Tax Implications for Your Beneficiaries?
Once the trust begins dispersing money to those you've designated as beneficiaries, the trustee must include a K-1 document for each payment given out and include those documents before submitting the trust tax return to the government. Your beneficiaries will receive their payments and a copy of the relevant K-1 but they must also include that information as supplemental income on their own personal returns.
Your beneficiaries may find themselves surprised that their trust money increases their income to the point where they are in a different, higher tax bracket. If you die and your revocable trust transforms into an irrevocable one, even your spouse may find a difference in the tax rate they paid before and after your death. It's wise to talk with beneficiaries and tax professionals while you're alive so all parties understand what their tax burden may be.
Tax issues related to your trust should be well known by you and your family. Professional tax services are vital for filling appropriate trust tax returns and clarifying details for everyone involved.