Irrevocable Trust Tax Returns: How to File Them?

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What is an Irrevocable Trust?

An irrevocable trust is a trust that cannot be modified, amended or revoked by the grantor (person that made the trust). An irrevocable trust is considered to be a separate entity for tax purposes by the Internal Revenue Service (IRS) and therefore a separate tax return must be filed for the trust. In many cases, annual disbursements are made to the beneficiaries of the trust to help defray the high tax rate paid by an irrevocable trust and must be accounted for when filing the tax return at year's end.

Confirm Trust Status

Confirm that the trust is, indeed, an irrevocable trust. The IRS looks at the instrument itself and at state law to determine whether a trust is an irrevocable trust. If the trust instrument itself is silent on the issue of irrevocability, then it is generally considered a revocable trust. As a rule, if the trust states that it cannot be modified, amended or revoked, then it is considered an irrevocable trust.

Read More: What Is a Family Trust?

Employee Identification Number

Apply for an employer identification number (EIN) for the trust if you do not already have one. You may apply for an EIN on the IRS's website, in the Resources. You will need basic information about the trust such as the name of the trustee and contact information, name of the trust and information regarding any business that the trust is engaged in.

Determine the Income

Determine that the trust generated enough income to require filing a tax return. A tax return must be filed if the trust generated more than $600 in income or if one of the beneficiaries is a non-resident alien.

Prepare IRS form 1041

Prepare IRS form 1041-Income Tax Return for Estates and Trusts. An irrevocable trust uses form 1041 unless it is declaring charitable donations in which case it must file IRS form 1041A - U.S. Information Return Trust Accumulation of Charitable Amounts. The trustee is generally required to sign the 1041 or 1041A.

Complete IRS Schedule K-1 for Each Beneficiary of the Trust

Many irrevocable trusts distribute income throughout the year to beneficiaries to help keep down the taxes owed at the end of the year. Trusts are taxed at a high rate as a rule so paying out some of the income can help defray the taxes owed on the trust.

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