Death of a Tax Payer and a living revocable trust

[rsherry8]

A tax payer dies on June 1, 2023 with income producing stocks and bonds inside a living revocable trust. Before the tax payer dies, the trust was reporting the income under the tax payer Social Security number. The money is going to the tax payer's son, possible in trust.

What tax id should the  income received after June 1, 2023 in the living revocable trust be reported to the IRS under? I am thinking it would either by the son's Social Security number or the EIN of the estate. If it  is reported under the wrong tax id is it a big deal?

[NCperson]

it can be a 'big deal'

the tax brackets for the trust are much more aggressive than individual tax brackets.  So if the money is supposed to be left in trust (and is not distributed to the son), the tax can be greater than if distributed to the son,  

Best to report the income as reflected by the legal documents that govern the distribution of the assets. 

[rsherry8]

So if it is going into an Irrevocable trust then use the EIN  of the  Irrevocable trust? If it is going to a person, then you would use the Social  Security number of that person. Do  I  have that right?

[Mike9241]

No that may not be correct.  Until the assets are retitled in the name of the son, the income from them is reported by the trust.   then you have to look to the trust documents to determine what it says regarding distribution of the income earned and corpus   

generally, the Trust would contain specific wording as to income and corpus distribution.

here's an example: commencing with the date of my death and during my son's lifetime, Trustee shall(means must) pay all income to my son ...................  (if instead of "must" the word was "may" distribution would be at the discretion of the trustee).   (income by the way does not include capital gains, that's part of corpus (trust principal) but again there may be provision in the trust or by operation of state law to allow the trustee to distribute capital gains.  Trustee may pay such sums from principal as the Trustee determines to be necessary or advisable from time to time for my son's health and support.

the wording for your trust is probably different. 

there is another possibility, quite unusual but not impossible, the son is named as the trustee of the trust of which he's the beneficiary. then it would seem that the trust has gone from being the father's grantor trust to being the son's grantor trust.  

[rsherry8]

As it turns out, the son is the only trustee and only beneficiary of the trust to be setup after the parent dies.  Are you saying that it is taxed as a grantor trust? meaning that the trust does not need to do its own tax return?

[Anonymous_]

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@rsherry8 wrote:

Are you saying that it is taxed as a grantor trust? 

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That could very well be the case (as @Mike9241 mentioned in his post), but it would be dependent upon the authority (powers) the terms of the trust grant to the son.

You should (or the son should) seek an in-person consultation with local tax counsel who can review the terms of the trust.

[dmertz]

The answer to the original question is that upon the death of the grantor, the trust becomes irrevocable and any income received by the trust after the date of death needs to be reported under the EIN of the trust.  No income after the date of death resulting from investments held in the trust is reportable under the decedent's SSN.

If gross income to the trust is more than $600 in any one of the trust's tax years, the trust must file Form 1041.

If mistakenly reported under the grantor's SSN, the payer should be asked to correct the reporting to show the payee as the trust under the trust's EIN.  If the payer will not make the correction, the nominee process can be used to move the income to the trust.

Whether or not the income to the trust can be distributed to the trust beneficiary and the tax obligation passed through to the beneficiary on Schedule K-1 (Form 1041) is a separate issue dependent on the terms of the trust.

[Anonymous_]

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@dmertz wrote:

If income to the trust is more than $600 in any one of the trust's tax years, the trust must file Form 1041.

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Unlike estates, trusts also need to file a 1041 if they have any taxable income for the tax year.