The Listen to Lawrence Letter: Do you have to file a tax return with an ID# for an irrevocable trust?

June 12, 2023
May 2, 2023 • Volume 4 Issue 134

Do I have to file a separate tax return with an ID# for an irrevocable trust? You explained a revocable trust in this article.

I was told no income tax was due when we did our irrevocable trust. But I still have to have an accountant fill out a form each year, which I pay for.


As you know, irrevocable trusts are a different animal than revocable trusts. With a revocable trust, you retain so much control that it is not surprising that the IRS ignores it for income tax purposes. Irrevocable trusts are more complicated and necessitate you giving up a lot of your control. Typically, when you create an irrevocable trust, it becomes an independent entity and must have a Tax ID# and file tax returns.

However, there is a section of the IRS code that says that if you retain TOO MUCH CONTROL over the trust assets then the IRS will ignore the trust and treat you as the owner of the assets in the trust. As the owner you would pay the tax and you can use your own social security as the trust ID#. This section of the IRS code is called the GRANTOR TRUST RULES.

What constitutes too much control, you ask? Good question! The IRS code spells this out and, suffice it to say, I purposely draft your Medicaid trusts so that you violate these rules, retaining too much control. As such, your Medicaid trusts are GRANTOR TRUSTS and can be processed with your social security number and all trust income will be reported on your personal tax returns.

Note, however, we sometimes assign a formal Tax ID# to the trust, for various reasons. This does not change the fact that it is a Grantor Trust and that the trust will not pay any taxes.

I would also like you to know that upon the death of the trust Grantor, or one of the Grantors, the trust is NO LONGER a Grantor Trust. At this point, the trust must receive a Tax ID#, and recognize income on a formal tax return.

Lastly, I want you to know that you are technically required to file a tax return (Form 1041), even if the trust is a GRANTOR TRUST and the trust is not liable for any tax. However, in spite of my formal advice to file a tax return, my experience is that hardly anyone files these returns since no tax is due and all income is reported on the Grantor’s 1040. The government just wants to know what is going on, so they require an informational tax return showing that you will pick up the tax personally.

Obviously, this is a much more complicated subject, but I hope this helps.

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