Grantor Trusts

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NOTE - this article was created based on excerpts from the 2005 Instructions for Form 1041. It has not been updated since. Rather than relying on information in this article, please go to www.irs.gov for the current year instructions, and also use the yellow search box to find discussions that comment on "grantor trusts" (also search on "grantor trust").


Grantor Trusts

If the trust instrument allows the grantor to retain certain powers or ownership benefits, then the person creating the trust (the grantor) is treated as the owner of the trust's assets. Such a trust is a grantor type trust.

In general, a grantor trust is ignored for tax purposes and all of the income, deductions, etc., are treated as belonging directly to the grantor. This also applies to any portion of a trust that is treated as a grantor trust.

Fill in only the entity portion of Form 1041. Do not show any dollar amounts on the form itself; show dollar amounts only on an attachment to the form. Do not use Schedule K-1 as the attachment. The fiduciary must give the grantor (owner) a copy of the attachment.


Form 1041 Grantor Trusts Simple Trusts - General Information

  • Form 1041, Page 1 and 2 only, with Grantor Statement on Page 1, and Grantor Letter instead of K-1
  • Grantor is treated as the owner of any portion of a trust in which he has a 5% of more reversionary interest
  • Grantor trusts MUST distribute 100% of the income
  • Grantor trusts do not generally pay estimates or file Amended returns

Who Must File

Form 1041 - U.S. Income Tax Return for Estates and Trusts

  • Any taxable income, OR
  • Gross Income of $600 or more, OR
  • A nonresident alien beneficiary

When to File

  • 15th day of the 4th month after the end of the tax year

Extension:

  • First Extension - Form 8736, 3 month automatic extension
  • Second Extension - Form 8800, 3 month additional extension

Final Return

  • The trust is terminated when all assets have been distributed
  • Trusts must have predetermined lives due to the rule of perpetuities. This limits a trust's life to the life of the beneficiaries plus 21 years

Grantor Attachment to Form 1041

On the attachment, report:

  • The name, identifying number, and address of the person(s) to whom the income is taxable.
  • The income of the trust that is taxable to the grantor or another person under sections 671 through 678. Report the income in the same detail as it would be reported on the grantor's return had it been received directly by the grantor.
  • Any deductions or credits that apply to this income. Report these deductions and credits in the same detail as they would be reported on the grantor's return had they been received directly by the grantor.
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