Irrevocable Trust Question

[melpaw57]

I am the trustee of an Irrevocable Trust, my parents are the Grantors. The Trust does not name any Beneficiaries, but it does state that the Trustee shall distribute the net income to the Grantors (in quarterly or more frequent installments). In researching this issue online, I found information that according to the Internal Revenue Service, a grantor may not be the irrevocable trust beneficiary, and that combining the two roles may be an abuse of trust tax laws. So as far as preparing the taxes, how would I report this?  I understand that Form K-1 is supposed to be completed and sent to each Beneficiary for income distributed to him or her, but even though the income was distributed to my parents it seems they cannot be Beneficiaries?

Thanks in advance for any clarification.

[Anonymous_ · Accepted solution]

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@melpaw57 wrote:

I am the trustee of an Irrevocable Trust, my parents are the Grantors. The Trust does not name any Beneficiaries, but it does state that the Trustee shall distribute the net income to the Grantors (in quarterly or more frequent installments).

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That trust term would make your parents the de facto beneficiaries.

Moreover, an irrevocable trust can most definitely be a grantor trust.

You might want to consult a local tax professional and/or local legal counsel for this matter.

[melpaw57]

Thank you for the response. 

[Mike9241]

if any of the trust's assets are held in an account with the trust's EIN or use the trust's EIN number, then a grantor trust return must be filed. it's still a 1041 but the grantor trust box is checked which produces a statement on the first page that it is a grantor trust, rather than a k-1 a grantor trust letter is generated detailing each item of income and deductions that were entered for the trust. then each of these separate items to the extent that would affect your parent's taxes would be entered in Turbotax for their 1040. the trust return needs Turbotax Business to prepare it. Windows only. no online prep.  

[melpaw57]

Thank you, but I don't believe that this is a "Grantor Trust".

The trust document states that "the Grantors (my parents) hereby irrevocably assign to Trustee (me) the property described in Schedule A (which includes stocks, savings accounts, and their home)". It further states that "Trustee shall hold, manage, invest and reinvest the Trust Property, collect income therefrom, and distribute net income to Grantors".

My understanding is that a grantor trust is a trust in which the individual who creates the trust is the owner of the assets and property?

[Anonymous_]

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@melpaw57 wrote:

My understanding is that a grantor trust is a trust in which the individual who creates the trust is the owner of the assets and property?

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That is correct, but you need to understand not only trust and estate law, but tax law as well. 

For one thing, the technical legal term for one who establishes a trust is called the settlor (some use the term trustor). The term grantor is actually a federal tax term and is applicable for the purposes of establishing who owns the corpus (assets) held in the name of the trust for tax purposes (note that creditors may also be able to reach these assets depending upon the terms of the trust and parties thereto).

One example, which may very well apply here, is a trust called an intentionally defective grantor trust (IDGT). This trust is essentially irrevocable for all purposes but the grantor(s) are still taxed on the income generated by the trust assets. The purpose of an IDGT is to move assets out of the estate(s) of the grantor(s). As a result, the trust is treated separately from the grantor(s) for gift and estate tax purposes, but is treated as being owned by the grantor(s) for income tax purposes (and the grantors report and pay any tax due on the income).

You really need to consult, in person, with local tax and legal counsel for this matter. There are variations and permutations of trusts, wills, and estate planning techniques and some are extremely complex. A local professional who can review all of the terms of the trust is your best bet for a complete understanding.

[melpaw57]

Thanks TagTeam.

Sorry for the delayed response on this issue, but I contacted the attorney who wrote the Trust (this person is the "go to guy" around here for Trusts) but I still have some questions/concerns . So since the Trust is already  a done deal, I guess my next step is to try and find a Tax Accountant who knows how to report it.

Thanks again, your input is invaluable.

[Anonymous_]

You are most welcome, @melpaw57 

You might try the link below for enrolled agents in your area.

https://taxexperts.naea.org/listing/service/estates-gifts-trusts