Written by attorney Henry Daniel Lively

Do I need to File a Tax Return for My Living Trust?

I am frequently asked whether a taxpayer needs to file a tax return for their living trust. A living trust is a revocable trust that is typically formed by a husband and wife during their life time as their basic estate planning instrument. Both the husband and wife are the initial trustees who will manage the assets in the trust, they are the grantors/trustors that created the trust and placed the assets in it, and they designated the beneficiaries who are typically their family members and charities. Since this type of trust is revocable it can be amended or revoked entirely during the grantor's lives. This type of trust is not a taxable entity when it is formed, it is a way of holding title to assets that will be subject to the control of the trust based on the terms that are in the trust. In fact, it does not even receive a tax identification number at this stage.

When one of the grantors dies the trust is typically split in to at least two separate trusts, the survivor's trust and the decedent's trust. The surviror's trust will typically contain the survivor's separate property and their share of community property, and the decedent's trust will contain their separate property and their share of community property. The decedent's trust will become irrevocable at that point and will receive a tax identification number. It will now have to file a trust tax return, Form 1041, each year it continues in existence. When the survivor dies the surviror's trust will become irrevocable as well, receive a tax identification number, and will also be required to file a 1041 return each year it continues.

The bottom line is that so long as a trust remains revocable it is not required to file a tax return of its own. So where does the income and expenses of this type of trust get reported? It is included on the grantor's individual income tax return (Form 1040). For example, all of the mortgage interest and property taxes is still reported on Schedule A, Interest income and dividends on Schedule B, and capital gains and losses on Schedule D as though the trust was never formed.

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