• Skip to main content
  • Skip to primary sidebar
  • Skip to footer
< class="site-title" itemprop="headline">Flood & Masiuk LLC | Southampton Estate Planning Attorneys

Attorneys At Law

  • Home
  • Our Firm
    • About Our Firm
    • About The American Academy
    • Advantages of Working With Our Firm
    • Attorney and Staff Profiles
    • Speaker Connection
  • Estate Planning
    • Asset Protection and Business Planning
    • Estate and Gift Tax Figures
    • Estate Planning
    • Family-Owned Businesses & Farms
    • Incapacity Planning
    • IRA & Retirement Planning
    • Legacy Planning
    • LGBTQ Estate Planning
    • Pet Planning
    • SECURE Act
    • Special Needs Planning Services
    • Trust Administration and Probate
  • Elder Law
    • Are You A Caregiver?
    • Coping With Alzheimer’s
    • Emergency Medicaid & Nursing Home Planning
    • Guardianship & Conservatorship
    • Hospice Care
    • Medicaid Planning
    • Veteran’s Benefits
  • Resources
    • DocuBank
    • Elder Law Resources
      • Elder Law & Medicaid Definitions
      • Elder Law Reports
    • Estate Planning Resources
      • Estate Planning Checkup
      • Estate Planning Definitions
      • Estate Planning Needs Checklist
      • Estate Planning Reports
      • Incapacity Planning Definitions
      • Is Your Estate Plan Outdated?
      • Top 10 Estate and Legacy Planning Techniques
    • Frequently Asked Questions
      • Frequently Asked Questions for Families Without an Estate Plan
      • Legacy Wealth Planning FAQ’s
      • LGBTQ Estate Planning FAQs
      • Trust Administration & Probate FAQs
    • LGBTQ Resources
    • Newsletters
    • Special Needs Resources
    • Trust Administration & Probate Resources
      • Bereavement Resources
      • How to Know if You Need Extra Help With Your Grieving
      • Loss of a Loved One
      • The Mourner’s Bill of Rights
      • Things You Need To Do When a Loved One Passes Away With a Trust
      • Things You Need To Do When a Loved One Passes Away With a Will
      • Trust Administration & Probate Definitions
  • Reviews
    • Our Reviews
    • Review Us
  • Blog
  • Contact Us
Home / Estate Planning Articles / Trusts and Income Tax: Who Pays?

Trusts and Income Tax: Who Pays?

May 31, 2012 by Marianne Flood, Estate Planning Attorney

Compliments of Our Law Firm,
By: The American Academy of Estate Planning Attorneys

Trusts are an incredibly useful estate planning tool, and theyre 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 dont 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 dont 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 grantors social security number.

Lets 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.

NonGrantor 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.

Lets 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 1041to 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 can assess your situation and help make sure youre playing by the right rules.

About Marianne Flood, Estate Planning Attorney

As the founder and managing partner of the Southampton, Pennsylvania law firm of Flood & Masiuk, LLC, Marianne Flood oversees a practice devoted to providing clients with personalized service and counsel in all aspects of estate planning.

Primary Sidebar

Is Your Plan Outdated?

Change is inevitable! See if your plan is outdated and if you need to take action to protect your loved ones.
  • This field is for validation purposes and should be left unchanged.

Flood & Masiuk LLC | Southampton Estate Planning Attorneys

112 Lakeside Park
Southampton, PA 18966
Phone: (215) 322-6330
Fax: (215) 322-9199

MAP

map for Flood & Masiuk LLC office

Opening Hours

Monday9:00 AM - 5:00 PM
Tuesday9:00 AM - 5:00 PM
Wednesday9:00 AM - 5:00 PM
Thursday9:00 AM - 5:00 PM
Friday9:00 AM - 5:00 PM

Footer

  • Disclaimer
  • Sitemap
  • Contact Us

© 2023 American Academy of Estate Planning Attorneys, Inc.

All Rights Reserved.
Attorney Advertisement

footer-logo
  • fb
  • twitter
  • linked-In