Filing Status Under an Irrevocable Trust

[carriskoul]

Hello - I have read several posts related to Irrevocable Trusts and the IRS instructions for Form 1041.

Needless to say, the IRS language is a little unclear and many of our T-T community posts vary depending on their respective circumstances.

I would hope our situation perhaps may be a little straight forward but wanted to make sure I understand the nuisances (if any).  So, here it goes.

• Trust agreement made, executed & entered into by my mother-in-law titled "The (her name) Irrevocable Trust" as the Trustor (term is same legal meaning as the Grantor, Settler, Trustmaker referring to the maker of a trust) executed on 1/04/2023.
• Myself and my wife (her daughter) are entered as the Co-Trustees.
• Schedule A of Trust only includes her property (condo residence) and one brokerage account (i.e. stocks, mutual funds, etc.), where these assets are also referred to as the Trust Estate within the Trust document of which we have power over.
• The brokerage statements are mailed to my address since my mother-in-law is ill:

          "Her Name" Irrevocable TR

          U/A DTD 01/04/2023

          My name and wife's name TTEE

          Our address

Now my questions and hope I am asking the right things:

1. Her brokerage 1099's I would expect will be sent to us from the brokerage firm but will any of the accounts DIV, INT, gains/losses still fall under the responsibility of my mother-in-law's for tax reporting purposes or will it be paid to us?
2. Is this trust considered a living trust even though it is not specially called that in the document title (also to note, my mother-in-law's Irrevocable Trust is in force until her death and then transfers into a Revocable Living Trust under my and wife's name)?
3. Does a 1041 need to be filed by my mother-in-law (note no Trust assets were distributed amongst the beneficiaries named within the Trust document, and she is still alive)?
4. Do I need to file a 1041 for any reason since I'm a Co-Trustee?
5. If no filing of a 1041 is required by anyone, the IRS instructions note something about Optional Methods 1 or 2 may be used, but this is very confusing language.  Does this apply in our case (since nothing has happened during the year other than executing the aforementioned Trust document)?
6. Basically, do we go about our normal tax reporting business if nothing has transpired in 2023 other than creating the Trust document (i.e. my mother-in-law files her 1040-SR and myself and wife file our 1040 for the 2023 income tax year)?
7. Respectively does the same thing apply for the state of Illinois tax reporting?

[tagteam]

Does the trust have an EIN? If so, did you provide the EIN to the brokerage firm?

More importantly, you need to have the trust reviewed by a local tax professional and/or legal counsel who can actually read the terms contained therein. Irrevocable trusts can be grantor trusts depending upon whether certain powers or rights are retained by the settlor (your mother-in-law).

The optional methods you read about (in the 1041 instructions) pertain to grantor trusts and the three methods are based upon whether or not a grantor trust has a tax ID number (EIN). 

'

Otherwise, grantor trusts filing a 1041 get a grantor information statement while nongrantor trusts issue a K-1.

[carriskoul]

Hello,

Trust does not have an EIN.

My mother-in-law's SSN would be the tax ID.

The brokerage account is under our authority (i.e. U/A DTD).

Also confirming from a monthly statement that the brokerage firm lists it as a Living Trust account.

[tagteam]

If the trust is a grantor trust (appears to be the case), then it is disregarded for federal income tax purposes.

You can use one of the optional methods of reporting in the 1041 instructions. In this instance, your mother-in-law would report any income/gain as if the trust did not exist using her SSN number (i.e., on her 1040).

[carriskoul]

It appears that this would be Method 1 (certainly not Method 2 as we did not submit any 1099's to the IRS as trustees)?

If Method 1, she files her 2023 1040 as she would normally have in prior tax years except now the only difference from prior 1099 brokerage account statements (i.e. imported 1099 data into T-T from JPM) is that it will now show the respective info under her irrevocable trust name, U/A DTD and trustees' names (wife and I) with our address - is this an accurate statement?

Also, in reading the Method 1 info below, with us overseeing the trust as the trustees (we have general/enumerated powers), and expecting the 1099's will be reported to the IRS by JPM under her SSN, is there even a need for a W-9 Form?

We did not deal with any W-9's that I'm aware of.

The rest of the bullet items below I interpret as, with us being the trustees, we will need to forward the 1099 JPM tax statements to her so that she can file her personal 1040 return - is this correct?

Optional Method 1. For a trust treated as owned by one grantor or by one other person, the trustee must give all payers of income during the tax year the name and TIN of the grantor or other person treated as the owner of the trust and the address of the trust. This method may be used only if the owner of the trust provides the trustee with a signed Form W-9. In addition, unless the grantor or other person treated as owner of the trust is the trustee or a co-trustee of the trust, the trustee must give the grantor or other person treated as owner of the trust a statement that:
• Shows all items of income, deduction, and credit of the trust;
• Identifies the payer of each item of income;
• Explains how the grantor or other person treated as owner of the trust takes those items into account when figuring the grantor's or other person's taxable income or tax; and
• Informs the grantor or other person treated as the owner of the trust that those items must be included when figuring taxable income and credits on their income tax return.

Grantor trusts that haven't applied for an EIN and are going to file under Optional Method 1 don't need an EIN for the trust as long as they continue to report under that method.

[tagteam · Accepted solution]

What you stated in your post is essentially correct and there would be no need for a W-9 to issue unless you want to use a 1041 and grantor information statement. Otherwise, the return would contain her social security number on her 1040.