The Listen to Lawrence Letter: Does a trust always have to file an income tax return?
April 13, 2022
Dear Clients and Friends:
Must a trust always file an income tax return? Read on…
CLIENT QUESTION:
Hi. Just curious, I have an irrevocable Medicaid trust with some investments but the taxes are paid by me not the trust. Still, my accountant insists the trust has to file a tax return. Is this true? Thanks.
MY RESPONSE:
While the Grantor (or Grantors) of the trust is living (or both are living), the trust I create is a special type of trust, called a Grantor Trust. A Grantor Trust is one where the trust is ignored for income tax purposes and you are required to pay income tax on trust income whether the trust pays the income to you or not. A Grantor trust does not have to file an income tax return because the trust does not exist for income tax purposes. Often we assign your social security number to the trust rather than obtaining an official trust tax ID number. Having said this, we often will issue a tax ID number for a trust with a husband and wife as Grantors because the trust will no longer be a fully Grantor Trust at the death of the first spouse.
In these cases, while both spouses are living, it is appropriate to file a simple INFORMATIONAL RETURN alerting the IRS that this is indeed a Grantor Trust and you will personally be paying the tax. Understand this, an INFORMATIONAL RETURN is not a full-blown tax return and the accounting fees should reflect that fact. Please show this LISTEN TO LAWRENCE LETTER to your accountant.
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peace, health and happiness,
Lawrence Eric Davidow