When a person (“Trustor”) establishes a revocable living trust during his or her lifetime for the Trustor’s benefit and the Trustor is the trustee of the trust, most of the time the trust is not required to file a separate income tax report, Form 1041. When the person creating the trust is also the beneficiary of the trust, the trust is “self-settled.” All income and deductions of the trust are reported on the Trustor-beneficiary’s individual income tax return, Form 1040. This saves the cost of the preparation and filing of an additional income tax return for the trust.
However, what happens when the Trustor-beneficiary dies? In addition to the decedent’s final income tax return, Form 1040, having to be filed, the trust now becomes a potential taxpayer and the trust may be required to file its own income tax return, Form 1041. The current trust filing requirements are if the trust has any taxable income or if the trust has gross income of $600 or more or if a nonresident alien is a trust beneficiary. The timely filing of the trust tax return is the legal responsibility of the successor trustee or trustees. A federal employer identification number must be obtained for the trust, and the number is used as the trust’s taxpayer identification number for the trust assets and on the tax return.
What if the trust was established by a husband and wife and there is a surviving spouse? If the surviving spouse has the right to all of the trust income and principal without limitation, is the sole successor trustee of the trust, and has the right to amend or revoke or terminate the trust, the trust may avoid filing a separate income tax report, Form 1041. Again, in this situation all of the trust income and deductions may be reported on the surviving spouse’s income tax return, Form 1040.
Another common income tax question is can the surviving spouse file a joint income tax return, Form 1040, for the year in which the death occurred even though his or her spouse did not live the entire tax year? The answer is yes, a joint income tax return can be filed for the year in which the death occurred. This is helpful from an income tax point of view since the personal exemption amount for the 2013 tax year is $3,900.
There are numerous other income tax issues when a trustor-beneficiary dies. For example, does a beneficiary of the trust have to report part or all of their inheritance on their income tax returns? The Jeffrey Burr law office has over 30 years of experience in administering trusts when a trustor dies, and the attorneys and support staff of the Trust Administration Department can answer this and other income tax questions a successor trustee and/or beneficiary may have.