Do living trusts file tax returns?

Tax filing by living trusts for income earned would depend on their structure and income-generating activities. There are, primarily, two types of living trusts: revocable and irrevocable, with different tax obligations for filing returns.

Revocable Living Trusts

Because the grantor retains control over the assets in a revocable living trust, it is treated as a "disregarded entity" for tax purposes. The income, deductions, and credits of the trust are reported on the personal tax return of the grantor using the grantor's Social Security number. Thus, no separate tax return is filed by the trust during the lifetime of the grantor.

Irrevocable Living Trusts

An irrevocable living trust is a separate legal entity. It needs its own tax identification number and has to file IRS Form 1041 if the trust earns $600 or more in taxable income in any given year. Beneficiaries may also have to report their distributions as income on their personal returns.

Tax Filing Considerations

1. Income-Generating Assets: If the assets held in the trust generate income, like interest, dividends, or rental income, the trust will have to file a tax return.
2. After the Grantor's Death: A revocable trust becomes irrevocable upon the death of the grantor. In this case, it has to file a tax return if it generates any taxable income.
3. Tax Deductions and Credits: Trusts can claim deductions for specific expenses, including administrative and legal fees.

Proper Filing Ensures Compliance

Properly filing trust tax returns means that your trust is in compliance with the tax laws, avoiding fines and protecting the assets of the beneficiaries. Professional trustees or tax professionals are usually appointed to manage these responsibilities efficiently.

For professional management of trusts and professional support in tax filing, consider One Pacific Trust.