TurboTax Business doing Trust tax

[ZengFreeman]

Forgive me, I know nothing of the trust. I have an irrevocable trust established for me as a sub trust. It is also a grantor trust for tax purpose.  My friend left me some money after he died last year, less than 30k from his IRA account. I will have to pay tax for the 30k as I will receive K1.  As I was playing around with the TurboTax business software, I came across the screen asking me whether I am the grantor of the trust, but then explain the grantor as someone who manages the trust. I am confused. I thought the grantor is the creator of the trust, which will be my friend. The trustee is the one(me, in this case) manages the trust. 

So is turbotax business messed up? if not, who is the grantor here managing the trust. 

[tagteam]

Grantor trusts are addressed in Sections 671-678:

A grantor trust is any trust in which the grantor retains one or more of the following powers:

• A reversionary interest of more than 5% of the trust property or income;
• The power to revoke the trust and/or to return the trust’s corpus/principle to the grantor;
• The power to distribute income to the grantor or grantor’s spouse;
• Power over the beneficial interests in the trust;
• Administrative powers over the trust allowing the grantor to benefit.

A trust is also a grantor trust under either of the following circumstances:

• A trustee, beneficiary, or other person a power exercisable solely by himself to vest the corpus or the income therefrom in himself;
• A United States person who directly or indirectly transfers property to a foreign trust.

[ZengFreeman]

Sorry, I am not sure you answered my question.

In the turbotax business software, when it comes to the question are you the grantor of the trust, it explains the grantor as someone who manages the trust, not someone who created the trust. Is grantor the same as trustee

[tagteam]

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@ZengFreeman wrote:

.......Is grantor the same as trustee

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You need to make a determination as to whether or not you are the grantor of the trust based upon the factors set forth in the Internal Revenue Code (read my previous post).

Whether you are treated as a grantor of the trust is dependent upon the criteria outlined. In a nutshell, if you are the owner of the assets in the trust or have certain powers over those assets, then you are treated as the grantor of the trust for federal income tax purposes (i.e., the trust is treated as a disregarded entity).

Note that a grantor can also be the trustee (or a trustee), but does not necessarily have to be a trustee. 

[ZengFreeman]

Thanks. This whole thing is so confusing. Then it looks like I am the grantor of the trust since I can distribute the money to myself entirely, even though the trust is the subtrust of my friend's revocable trust. 

If I am the grantor of the trust, does that mean the trust is a grantor trust, right? If the trust receives the K1, do the trust pay the tax, or pass through the k1 to me and I pay when file personal income tax. 

[tagteam]

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@ZengFreeman wrote:

...it looks like I am the grantor of the trust since I can distribute the money to myself entirely....

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Yes, if that is the case then you essentially are treated as the owner of the assets (money).

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@ZengFreeman wrote:

If I am the grantor of the trust, does that mean the trust is a grantor trust, right? 

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Yes, a grantor trust is disregarded for federal income tax purposes and you can typically report directly on your individual income tax return (1040).

[If you get a K-1 from another trust, you can report that on your 1040]

[ZengFreeman]

Thank you. More question: based on the IRS rule, an irrevocable trust needs to file tax return. Since this is also a grantor's trust, the income pass through, does the trust still need to file tax return?

[ZengFreeman]

The K1 I received will be addressed to this trust, not to me directly, am I still allowed to report that k1 income directly at my personal 1040 tax? Do I still need to file tax for this particular irrevocable grantor's trust?

[tagteam]

Yes, you can report the K-1 on your personal 1040. 

There are optional methods for grantor trust reporting depending upon whether an EIN was obtained and whether that EIN was given to payers of income.

See https://www.irs.gov/instructions/i1041#en_US_2023_publink1000286020

[ZengFreeman]

The lawyer got EIN for the trust under my name like X Y Trust, K1 will be issued to X Y Trust. So based on my circumstance(irrevocable grantor's trust), Do the trust need to file  the tax for the K1? If it passes to my personal tax, do the trust still need to file tax? Or can the trust file the tax and pay the tax on the k1 received.

[tagteam]

If you receive a K-1 in the name of the trust and with the trust's EIN, then you would file a 1041 to report the K-1 the trust received. 

In turn, you would file a 1041 for your trust, but it would be a grantor trust return (1041, but with a grantor information statement instead of a K-1). You would then enter the information from the GIS into your own personal income tax return (1040).

[ZengFreeman]

Sorry, more question. You have been a God Savior here.  What shall be included in the Grantor Information Statement? Where shall I include the K1? And who pays the tax on the K1, the trust, or my personal tax? 

[tagteam]

A grantor trust return (1041) is basically blank and refers to the grantor information statement for details of any income, gain, expenses, etc.

The GIS includes items of interest, dividends, gains, et al, as separate line items which, in turn, you enter on your 1040. 

[ZengFreeman]

But do I have alternative such as the trust files the tax and pays the tax on the K1 addressed to the trust, leaving personal income tax untouched?  For two reasons, one we had finished personal income tax already. Second, if pasd through to our personal tax, we will pay more taxes as it hits higher tax bracket. 

Many thanks

[tagteam]

Grantor trusts do not pay income tax; they are disregarded for federal income tax purposes.