Listen to Lawrence…Do I have to file form 1041 if I have an irrevocable trust?

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CLIENT QUESTION:
Your firm created an irrevocable family trust for me 3 years ago to protect my assets from Medicaid.  Do I have to file a Form 1041? The trust is under my social security number and it did have taxable income from investments. I was told that I didn’t have to file a trust return when the trust was created.
ANSWER:
If we told you that, it must be the right answer! 😊  All kidding aside, you do not have to file an income tax return for the trust. All trust income must be reported on your personal 1040 tax return.
Normally, a trust is supposed to file a separate tax return, called Form 1041, unless the trust is considered to be a GRANTOR TRUST. Upon creation, ALL of my Irrevocable Medicaid trusts are GRANTOR TRUSTS. “What is a Grantor trust?” Suffice it to say that the IRS code has a section that spells out the meaning, but the bottom line is if you, the trust Grantor, retain too much control over the trust, then the Grantor Trust rules are invoked…meaning that the trust is ignored for income tax purposes. It is like the trust does not exist (for tax, not Medicaid purposes) and all trust income is reported on your personal return.
Usually, we do not issue a tax ID# and instead, we just use your social security number for the trust. On the other hand, we can (and sometimes do) issue a tax ID# number for the trust, and when we do you may send notice to the IRS each year that you will not be filing a tax return for the trust because it is a Grantor Trust and you will be reporting the income on your personal return.
In cases where I have two Grantors (husband and wife), I often issue the Tax ID# up front because the trust will cease to be a Grantor Trust upon the first death. At the first death, the trust will thereafter only be a 50% Grantor Trust, so the trust will have to file its own Form 1041 going forward.  Understand, with a two Grantor case, we can also just use the SS# now and then issue the Tax ID# at the first death.
I welcome follow-up questions on this topic, especially right now, just prior to tax returns being due.
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