Morris Hall, PLLC

Estate Planning Attorneys

MakePayment with multiple options
CALL NOW: 1 (888) 222-1328
  • Home
  • Our Firm
    • About Morris Hall
    • Attorneys
    • Our Team
    • Morris Hall Core Values
    • Communities We Serve
      • Arizona
        • Carefree
        • Flagstaff
        • Mesa
        • Oro Valley
        • Phoenix
        • Prescott
        • Scottsdale
        • Sedona
        • Tucson
    • Career Opportunities
  • Our Services
    • Asset Protection
    • Probate
    • Tax Planning
    • Trusts
    • Trust Administration
    • Wills
  • Resources
    • Blog
    • Do I Need an Estate Plan?
    • Elder Law Reports
    • Elder Law Resources
      • Phoenix Elder Law
      • Tucson Elder Law
    • Estate Planning Problems
    • FAQs
    • Probate Resources
      • Probate
      • Flagstaff Probate
      • Phoenix Probate
      • Sedona Probate
      • Tucson Probate
    • Published Books
      • Don’t Go Broke in a Nursing home
      • Tax Free Money for Long-Term Care!
    • Recent Law Changes and Improvements Affecting Arizona
      • Update My Living Trust
    • Reports
    • Videos
    • What to Do When Death Occurs
      • What Not To Do When Someone Dies
      • Who To Contact After A Loved Ones Death
  • Reviews
    • Testimonials
    • Review Us
  • Locations
  • Events
    • Seminars / Webinars
    • Past Webinar Recordings
  • Contact
    • Consultation Policy
    • Contact Us
    • Discounts

Trusts and Income Tax: Who Pays?

Trusts and Income Tax: Who Pays?

Written by the American Academy of Estate Planning Attorneys
Compliments of Morris Hall

 

Trusts are an incredibly useful estate planning tool, and they’re becoming ever more popular. But, as Trusts gain popularity, a question comes up more and more often: who pays the income tax on a Trust? It seems like a simple inquiry, but the answer can be hard to pin down. As a matter of fact, sometimes even lawyers don’t know.

So, who does pay the income tax on a Trust? Here is the answer, in a nutshell:

Grantor Trust

The first step in figuring out who is responsible for the income tax is to determine whether a Trust is a “grantor” Trust. The grantor is the person who created and funded the Trust, and a grantor Trust is one where the grantor has retained certain powers.

For instance, if you established a Trust and retained the power to substitute assets or to revoke the Trust, you have a grantor Trust. A grantor Trust is taxable to the grantor, whether or not any distributions were made from the Trust to the grantor during the tax year in question. In other words, if you have a grantor Trust, all the property in the Trust is treated as your property for income tax purposes. In fact, many grantor Trusts don’t even have their own tax identification number; instead, the income and expenses incurred by such Trusts are simply reported to the Internal Revenue Service under their grantor’s social security number.

Let’s look at an example:

James Smith creates the Smith trust, a grantor Trust. The Trust has $30,000 in income for the year and it distributes $10,000 to Ellen, who is not a grantor. The entire $30,000 is included on James’ tax return; Ellen does not include the distribution to her on her income tax return.

Non–Grantor Trust

Any Trust that is not a grantor Trust is classified as a “non-grantor” Trust. A non-grantor Trust is treated as a separate tax entity from the person who created it, and taxation of this type of Trust depends on the distributions made by the Trust in any given tax year.

Let’s take a fresh look at the previous example:

If the Smith trust were a non-grantor Trust and it had $30,000, with a $10,000 distribution to Ellen, three things would happen. First, the Trust itself would file its own income tax return – Form 1041—to report its income for the year. Second, the Trust would issue a K-1 Form to Ellen, alerting her that she had $10,000 in income in the form of a Trust distribution. Third, Ellen would report the Trust distribution as income on her own personal income tax return – Form 1040.

If you are the creator or the beneficiary of a Trust, it is vital that you know the tax rules that apply. Otherwise, you could be failing to report income that should be taxed to you – or you could be reporting income on which someone else should be paying income taxes. A qualified estate planning attorney at Morris Hall can assess your situation and help make sure you’re playing by the right rules.

At Morris Hall we provide a free initial consultation.  To schedule your appointment today, simply call 888.222.1328.

MH logo

Main Office

7600 N 16th St, Ste 105

Phoenix, AZ 85020

Phone: 602-249-1328

Fax: 602-248-2887

Subscribe to Our Newsletter

For a sample Click Here

Offices

Our law firm proudly serves many areas in Arizona. See all of our locations here.

Our law firm proudly serves the state of Arizona.  See all of our locations here.

Toll Free: 888-222-1328

Mon-Thur: 8:00am – 5:00pm
Fri: 8:00am – 4:00pm

  • Linkedin
  • Twitter
  • Facebook
  • Youtube
  • Instagram

Need an Estate Planning Lawyer in Arizona?

Looking for an estate planning attorney near you? We have office locations in Phoenix, Mesa, Chandler, Scottsdale, West Valley, Carefree, Prescott, Sedona, Flagstaff, Tucson, and Oro Valley in Arizona so please visit us at the location that is closest to you.

  • © 2023 American Academy of Estate Planning Attorneys, Inc All rights reserved.
  • Disclaimer