Posts Tagged ‘TIN’

Tax Issues for Trusts — Simplified

JULY 29, 2013 VOLUME 20 NUMBER 28

Judging from the questions and comments we get here, taxation of trusts is one of the most confusing issues we regularly write about. We’re going to try to collect the most important rules here for your convenience. Note that we will not try (in this summary) to touch on every exception, every caveat — we want to try to spell out some of the major categories of trusts and of taxation, and see if we can help you figure out what tax issues you have to face. We will try to give very concise answers, a little explanation and a warning about some of the more common or important exceptions in each category.

Do I need to get an EIN for my revocable living trust?

Short answer: no.

More detail: if you created a trust, put your money in it, and retained the right to revoke it — the IRS doesn’t think of it as a trust at all. It is not a separate taxpaying entity. Not only do you not need to get an Employer Identification Number, you can’t get one. A revocable living trust is always a grantor trust, and it does not file its own tax return.

Important exception: if you are trustee of a revocable living trust created by someone else, you can get an EIN but you are not required to do so. Even if you do get an EIN, the trust does not file a separate trust tax return.

I am setting up a special needs trust for my child, who has a disability. I plan on leaving his share of my estate to the trust. Does it need an EIN?

Short answer: probably not — yet.

More detail: while you are still alive you probably will be the “grantor” of the trust for tax purposes — and that may even be true if the trust is irrevocable. Probably you will pay the taxes on any income the trust receives (note: your contributions to the trust are not “income” for tax purposes). But probably this is not important — you really are probably asking about what happens when you die and your estate flows to this trust. THEN it will need an EIN and it will file its own tax returns. Probably it will be what the IRS calls a “complex” trust.

Important exception: if the trust is both irrevocable and immediately funded, it probably does need an EIN even before you die and leave a larger share of your estate to it.

My daughter’s special needs trust was funded with money from a personal injury settlement. Does it need an EIN?

Short answer: almost certainly not.

More detail: even though it is irrevocable, and even though your daughter is not her own trustee, this trust is almost unquestionably going to be a grantor trust for tax purposes. That means it does not need to have a separate EIN; it uses your daughter’s Social Security number as its taxpayer identification number.

Important exception: although it does not have to get an EIN, this kind of trust may get an EIN. But even if it does, the trust does not file a separate income tax return — all the trust’s income gets reported on your daughter’s individual return.

My father established a revocable living trust to avoid probate, and he died earlier this year. Do I need to get an EIN for his trust? Can I just keep using his Social Security number?

Short answer: Yes, you do. No, you can’t.

More detail: With your father’s death his trust became a different entity. It is no longer a “grantor” trust, so should be filing its own income tax returns for the rest of the calendar year of his death and for the future (if the trust continues).

Important exception: While the trust should have its own EIN, it will only have to file a return if it earns $600 in income in any one year after his death. So if the trust gets resolved fairly quickly, and/or does not hold any income-producing property, it may not need a tax return. In that case, and that case only, it may also not need to have a separate EIN.

As a separate exception to the general rule, note that there are some limited circumstances in which your father’s trust may not have to use a calendar year. That can have significant favorable income tax consequences, so be sure to discuss the tax issues with your accountant and/or attorney.

My wife and I created a joint revocable living trust. She died two years ago, and I was simply too busy dealing with everything to do anything about the trust. Are there tax issues I need to resolve, or am I going to get into trouble for not doing anything quickly?

Short answer: You probably are not in any serious trouble, but you should talk with an accountant and/or attorney soon. Don’t continue to put it off, please.

More detail: It may be that nothing needs to be done regarding your trust. It may be that your trust was supposed to be divided into two shares upon the first death. It may be that such a division no longer makes tax sense — but it might still be necessary to deal with it. It’s too hard to generalize about all those possibilities, and your lawyer needs to look at the trust document AND know how assets are titled. Make an appointment and start gathering information. If you don’t do anything before your own death, your children (or whomever you have named as ultimate beneficiaries) will have a much more complicated time dealing with it than you do now. Incidentally, in our experience it is fairly rare that a surviving spouse does not want to make any changes whatsoever — even if all you want to do is to accelerate the pace at which your children receive your estate, it is a good idea to meet with your attorney.

Important exception: If you are certain that your trust does not require division into separate shares on the first spouse’s death, AND you still want the same people to administer your estate, AND you still want everything divided the same way as the original document provides, then it may not be necessary to make any changes. Most lawyers will tell you that it still makes sense to update powers of attorney and your will to remove your late wife’s name (just so your back-up agent doesn’t have to produce a death certificate before banks and doctors will talk with her), but it may not be critical to do so. Still, talking with lawyers is kinda fun, and almost everyone should do it more often.

There you have it. Our most-asked-about trust taxation questions, with simplified answers. Please be careful about this information, though — there is a lot of nuance we have glossed over. Talk to your accountant and your lawyer to confirm what we have told you here before relying on it. Our goal is to give you a bit of a roadmap, not to answer complex legal questions with oversimplified generic answers. But we hope we have helped.

EINs for Trusts: The Questions Just Keep Pouring In

APRIL 16, 2012 VOLUME 19 NUMBER 15
Tax ID numbers for trusts. When we first wrote about this topic, we did not appreciate how interested our readers would be. We thought that the issue was sort of dry, actually, and that most people would have asked their lawyer or their accountant for direction. It has become one of the most enduringly popular topics at the Fleming & Curti, PLC, website.

Imagine our surprise. The questions just keep coming. We can’t and don’t try to answer them all individually — we are not here to give free legal advice based on incomplete information, and most of the questions leave out at least some of the detail we would need. But we do find your questions instructive for purposes of figuring out the level of interest — and confusion — out there.

Here are a few of the questions we have gotten (edited for space, or to focus the question on the area we want to answer). Please, please, please remember that we are not trying to give specific legal advice here — we only want to help you focus your questions for when you talk with your own lawyer, or when you find yourself arguing with the well-meaning but misinformed support person at a major mutual fund company.

My parents set up a living trust as joint trustees and used my fathers SSN Dad died, Mom survives but is incapacitated, I am the successor trustee. Do I need to get a new TIN?

The key to determining when a trust needs its own EIN (employer identification number — the correct term for a taxpayer identification number for a non-human entity) is whether or not the trust is a “grantor” trust. While your parents were both living the trust was probably revocable and for their joint benefit; it almost certainly could use one or the other parent’s Social Security Number as its TIN. With the death of your father, the question now is whether the trust (a) is still revocable and (b) contains money that was originally your mother’s.

For purposes of determining the trust’s revocability, we can ignore the fact that your mother may not be mentally able to revoke the trust. The test is whether she would have the legal authority to do so, were she competent to attempt it.

More importantly, if the trust consisted of your father’s property (and not joint or community property), then it may not be a grantor trust any longer. In that case it may need its own EIN.

Whether or not it needs to have its own EIN, it is permissible for you to get one. This is true because your mother is no longer the trustee. Many banks and brokerage houses think that the fact that she is not trustee makes a separate EIN mandatory; they are wrong. But there is no harm in getting one, and it might make it easier to deal with the financial industry. What the tax returns would look like in such a case is a separate question — one you probably ought to pose to the accountant who prepares the trust’s and your mother’s tax returns.

What name do you give the “new” trust created after the death of a spouse?

The most common scenario is this: husband and wife have either a joint revocable trust or reciprocal trusts. In either case, upon the death of the first spouse a separate trust is created for the benefit of the surviving spouse. This trust is irrevocable and contains assets that belonged originally to the now-deceased spouse. As we have described before, this new trust (it might be more accurate to call it a modification of the old trust, which is now irrevocable) needs its own EIN. But what is it called?

The trust document itself might give the answer. Mr. and Mrs. Jones’ trust might say something like “the share described herein shall be set aside into the Jones Family Trust Marital Sub-Trust” or “the Jones Family Decedent’s Trust.” If the document names the new (or sub-) trust, use that name. If not, we usually use language that makes clear — and helps us remember — what kind of trust it is. Perhaps “the Jones Family Trust — Decedent’s Share” is clear enough.

There is no particular magic to the language. Clarity is the key. There are no trust policemen waiting to arrest you for getting the name wrong, and sometimes it is easier to let the broker or banker win these arguments — even when they are wrong. But if you are trustee it IS important that you keep track of which funds belong to which sub-trust if there is more than one, and that you not commingle the money between trusts or, worse yet, with your own money.

I have my own revocable living trust, and I know it does not need a new EIN — it uses my Social Security Number. But I’m getting claim forms from the annuity company after my mother’s death, and they want me to have a trust EIN. The form lists the EIN in the xx-xxxxxxx format rather than xxx-xx-xxxx. Can I just put my Social Security Number in that odd format?

Yes, that is what we would do. It likely will work — not so much because there is a clearly right answer, but because there is no easy way for the annuity company to double-check. Their form is wrong to assume that all trusts have an EIN, and you are not even permitted to get an EIN for your revocable trust when you are the trustee and the original owner of all its assets. We encourage you to put your Social Security Number in the xx-xxxxxxx format and see if it works. We have done that before and it has.

I have a trust within my Will naming my son as beneficiary and directing my niece, the trustee, as to when to make distributions. Does she need a EIN?

She certainly will when you die. Until then, the trust doesn’t really exist, so there’s nothing to apply for now.

This suggests a question not really asked: what happens when you die with a will creating a trust? The first part of the answer: we will need to probate your estate. If your intention was to avoid probate by creating a trust, putting it in your will does not accomplish that. We see much confusion about this point among our clients and audiences when we give public presentations. Sometimes they then say something like: “ah, but we took care of that problem — we named our son as POD beneficiary” (or, sometimes, as joint tenant with right of survivorship). Great — no probate. Also — no trust. If you want your son’s money to pass in trust AND to avoid probate, you will need to talk about creating a living trust, not a testamentary trust. But that’s a lecture for another day.

Those were fun questions, but we’re out of time and space for this week’s newsletter installment. But keep sending them in — your questions help us decide where to focus our future articles. Please remember, however, that we are not here to give specific legal advice — we look for questions that raise larger questions that help us explain legal concepts for a lay audience. We hope we have helped you understand exactly why you need a lawyer for your more specific legal question.

Tax Identification Numbers for Trusts After Death of Spouse

MARCH 26, 2012 VOLUME 19 NUMBER 12
Here at Fleming & Curti, PLC, we keep tabs on what brings people to our website. We look at referring pages, at search terms and at a variety of other items. We are intrigued by what persistently tops the search-engine list. The most common search? It’s some variation of: “do I need a new tax ID number for my living trust?” (For those keeping score, the second-most-common question seems to be “can I leave my IRA to a living trust?“)

Why the enduring interest? Because the question is so much less complicated than people think it is. There is a surprising paucity of clear information about when you need to have a new tax ID number (an EIN, if you want to use the correct acronym). And much of the information out there is contradictory.

We have written about the question several times before. In 2009 we asked and answered the question: “Do you need a new tax ID number for your living trust?” Just last year we reviewed the question, along with some other reader questions, and provided a little more detail on when your trust needs an EIN. Since those two explanations the rules haven’t really changed — but your questions have gotten a little bit more sophisticated.

Several of those questions deal with the same basic scenario: what happens when a husband and wife have a joint trust, using one spouse’s Social Security number, and then that spouse dies? The answer will depend on what the trust provides.

First, a word about joint trusts for spouses: they are common in community property states (like Arizona), not as common in those states where community property principles do not apply. Remember, please, that we are Arizona lawyers, and so we write here about Arizona rules. Attorneys from other states are more than free to add their comments; we will post them as we receive them — but we are not vouching for the accuracy of their advice in states other than Arizona.

Let’s set up a scenario, drawn from our common experience: Husband and wife created a joint revocable trust, and their bank accounts, brokerage accounts, insurance — all of their assets, in fact — listed the husband’s Social Security number. They could do that because, as with a joint account outside of a trust, tax rules allow one owner’s identifying number to be used rather than having to use all owners’ numbers. But now the husband has died. What should the (surviving) wife do about the TIN (Taxpayer Identification Number)?

Before we answer, we need to know what happens to the trust on the death of the first spouse. Let’s assume, for a moment, that it remains in one trust, that the wife now has the power to amend or revoke it in its entirety, and that she is the sole trustee. In that case, the direction is easy: tell the bank, the brokerage house and the insurance company to change the name of the trustee from the couple to the wife, and to change the TIN to the wife’s Social Security number. How do you do that? Send them a death certificate and a letter instructing them to make the changes. Assume, incidentally, that they won’t — it will often take you two or three tries, several phone calls, and some wheedling to get the task done. But that’s what should happen.

What if the wife is not the sole trustee? Let’s say, for a moment, that the oldest daughter now becomes co-trustee with her mother, but that the trust remains revocable and amendable by the wife. In that situation, we have the same answer: switch to the wife’s Social Security number.

What if the wife has the power to revoke or amend the trust, but she is now incapacitated? The oldest daughter is the sole trustee, and isn’t sure what to tell the financial institutions. The answer is still the same: the trust is still revocable (even though there may be no practical way to revoke it if the only person with power to do so is incapacitated), and the wife’s Social Security number is the trust’s TIN (expect to have an argument with the financial institutions over this one). Is a bank trust department the successor trustee instead? Same answer — but with the ironic twist that the argument between trustee and financial institution will now occur between two branches of the same organization.

Sometimes a joint revocable trust becomes irrevocable on the death of one spouse. More commonly it splits into two (or sometimes three) portions, one (or two) of which are irrevocable. What happens then? The answer, as you might expect, is a little bit more complicated — and may not be the same in every case.

Generally speaking, an irrevocable trust that does not contain the assets originally belonging to the beneficiary is likely to need its own EIN. That may mean that one (sometimes two) of the trusts resulting from the death of one spouse needs a new EIN, and one just uses the surviving spouse’s Social Security number.

Let’s use a specific example: in our earlier scenario, after the death of the husband the joint revocable trust splits into a “Decedent’s” (sometimes “bypass”) share and a “Survivor’s” share. The Decedent’s Trust is irrevocable. Wife is the trustee, and she is entitled to all the income from the trust. She may even have the ability to distribute trust principal to herself, or to decide how the Trust is divided among the couple’s children at her death. But this trust is not  “grantor” trust — it gets taxed as a separate entity. Hence, it needs its own EIN, and it files its own tax returns.

Mechanically, the process of dividing the trust is a little more complicated than in our earlier scenario. An estate tax return may be required (although it may not). A division of trust assets needs to be completed (the assistance of a competent lawyer and a good accountant is essential here). The share to be assigned to the Decedent’s Trust needs to be identified, and then physically transferred into a new account — often titled something like “The Jones Family Trust — Decedent’s Trust” (yeah, we know — your name isn’t Jones. Stick with us anyway). And that new account needs to use the Decedent’s Trust’s new EIN.

Note that we said that the assets need to be transferred into the new account. Most financial institutions will insist on opening a new account, with a new account number, rather than simply changing the name on an existing account. But when the process is completed — however you and the financial institution get there — the Decedent’s Trust should be physically separated from the Survivor’s Trust, it will have its own EIN, and it will need to file tax returns. Note: it probably will not pay any tax as a separate entity — all its income will  probably be imputed to the surviving spouse.

Meanwhile, the remaining trust assets in our example will continue to use the wife’s Social Security number. It may not be crucial to change the name on that account to “The Jones Family Trust — Survivor’s Trust” (those Joneses — they end up will all the money anyway). If you long for clarity, we would certainly support a transfer of the Surivor’s Trust share into a new account, titled as part of that sub-trust, and bearing the wife’s Social Security number — even if it is not required.

Recall, please, that there are lots of variations on this basic scenario. Be careful about generalizing from this information to your precise circumstances. Our goal here is to give you some general notions about what needs to be done — we do not think of ourselves as a substitute for good, personalized legal advice. We think, in fact, that you should get some of that, because your situation might well be more complicated than you think it is. But we hope we’ve given you some idea of what your attorney will be asking you, and what he or she is likely to tell you.

We Take a Stab at Some Of Our Common Legal Questions

FEBRUARY 21, 2011 VOLUME 18 NUMBER 6
We get asked plenty of general legal questions. We try to give helpful answers, recognizing that we can not give specific legal advice to non-clients (and particularly to questioners from outside Arizona, where we are licensed to practice law). Often our best answer is “check with a local lawyer familiar with the appropriate area of law.” Unsatisfying, but it really is the right answer in many cases.

Still, we want to get general legal concepts out to the public. Why? Because we think it makes non-lawyers recognize when the legal problem they face is too complex for self-help, and it even helps make the questioner a better client when they do get to the lawyer’s office.

What kind of legal questions can we answer? very general ones. Like these, which are some of our most common questions:

Does my living trust need a new tax ID number? The best way to answer this is probably to explain when a trust doesn’t need its own “Employer Identification Number” (EIN — even if the trust isn’t an “employer,” that’s the kind of tax ID number it will get).

General rule: every separate entity requires its own TIN, whether that is a Social Security number (for you) or an EIN (for your corporation, trust, LLC, or whatever). First major exception to the general rule: if your trust is revocable, and you are the trustee, for tax purposes it is not a separate entity at all — you don’t need an EIN and, in fact, you shouldn’t get one.

Now let’s make it a little more complicated. If your trust is irrevocable, or you are not the trustee, the rules are a little harder to parse. The key question is whether your trust is a “grantor” trust. If it is, and if there is only one grantor (or one married couple), then it does not need an EIN. If it is not, or if there are multiple grantors, it must have its own EIN.

Note that whether or not the trust needs (or is even permitted to get) an EIN is not the same question as whether it has to file a separate tax return. That one is more complicated, and we’ll save it for another day.

Can a revocable trust be named as beneficiary of an IRA? Yes, but be careful. This is something you should discuss with your attorney or your accountant (or both).

Before we talk about naming your trust as the beneficiary, we have a question for you: what are you trying to accomplish by naming the trust as beneficiary? If your trust divides equally and distributes outright among a fairly small number of beneficiaries upon your death, why not just name those beneficiaries on the IRA as well as in the trust? Then you don’t have to figure out the rules on naming a trust as beneficiary, and you don’t have to keep wondering if you’ve done it right.

Maybe you have a child who is ill, or a spendthrift, or needs to have his inheritance placed in trust. In that case — and in a few other cases — it can make sense to name your trust as beneficiary of your IRA. Now you need to become familiar with the difference between what lawyers usually call “conduit” trusts and “accumulation” trusts. The former require distribution of any money received from the IRA’s minimum distribution requirements each year, and the latter allow (but do not require) the IRA distributions to accumulate. The distinction is important; the accumulation trust will require distributions on the basis of the oldest possible beneficiary of the trust. That is the result in most cases where a trust is named as beneficiary.

These same rules apply, by the way, for other tax-qualified accounts, like 401(k) and 403(b) plans. Some advisers will tell you it is not even permitted to name a trust as beneficiary of an IRA or qualified plan. They are wrong, but the rules are a little difficult to figure out in individual cases. Also, some account custodians (that is, the bank or financial institution where the money is held) may limit or even prohibit trusts as beneficiaries.

How does community property work in Arizona? Nine U.S. states are usually listed as the “community property” states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In addition, Puerto Rico recognizes community property, and Alaska allows couples to choose community property treatment of their joint assets.

But what does it mean to have property held as community property? In Arizona, it means that the property is jointly owned, that each spouse has an equal interest, and that either spouse has the right to manage the property on behalf of the community.

When one spouse dies, his (or her) half int0erest in the community property normally passes according to his will or, if he did not sign a will, to his children (including those who are also children of the surviving spouse). To avoid that result couples are permitted to specifically designate their property as “community property with right of survivorship.” If that title has been used, the surviving spouse receives the entire community asset on the first spouse’s death. Note that the different community property states treat the right of survivorship differently, and we are only describing Arizona’s approach here.

It is also possible for a portion of an asset to be subject to community rights. This might happen, for example, if one spouse brought the property into the marriage but mortgage payments were made during the period of marriage from community income or assets. This kind of calculation is usually much more important in divorce proceedings than upon the death of one spouse.

Property received by inheritance or gift, and property owned before the marriage, are not community property — they are the separate property of the recipient or owner. Couples can choose to convert their community property into separate property, and can even agree that property acquired in the future will be treated as separate property.

Thanks. But I have a different question to ask. Go ahead — pose your question as a comment here, and we’ll try to answer it. Don’t be too surprised if we tell you that it is too specific, or requires knowledge of another state’s laws, or we can’t answer it for some other reason. But we’ll try to be helpful.

One word of caution: do not give us a detailed fact pattern and ask us for advice. We simply can not provide individual legal advice — free or even for a fee — based on unsolicited e-mails or comments. You will not have any lawyer/client privilege for your recitation of the facts, and we will not be able to help with that kind of inquiry. We do welcome your general questions that give us a chance to explain legal principles, though.

Do You Need a New Tax ID Number for Your Living Trust?

AUGUST 17, 2009  VOLUME 16, NUMBER 51

Imagine that you are trying to change the title on your bank account into the name of the living trust you and your spouse just set up. The nice lady at the bank is telling you that you need to get a new tax identification number for the trust. Could she be right? In a word, no.

Because we are lawyers, however, it is very hard for us to answer a complex question with a single word. So let us review some of the variations with you.

Is your trust revocable? This is the easiest variation. Give the bank (and your credit union, and your broker) your Social Security number. Joint trust between you and your spouse? No problem. Give them either Social Security number — just like before, when both of your names were on the account as individuals.

What if the trust is irrevocable? This is a little more confusing, but ultimately the answer is probably the same. If you receive any significant benefit from the trust, and your money went into it in the first place, you still use your Social Security number.

Is someone else the trustee of your trust? The answer is still the same — though many bank and brokerage officers will insist that this is what makes it mandatory for you to get a separate tax number. Simply put, they are wrong. If the trust is revocable use your Social Security number regardless of who the trustee might be. If it is irrevocable and someone else is the trustee, but you still receive benefits from the trust, use your Social Security number.

What if the trust is a “special needs” trust set up with your personal injury settlement or other funds? You still use your Social Security number. The “special needs” designation does not change the answer.

What about the “special needs” trust you set up with your money but for the benefit of your child? Now we’re getting interesting. Can you revoke the trust? What happens if your child dies before you do — does the money return to you? In either case, you probably use your Social Security number, and report the income on your tax return. Talk to your accountant and/or lawyer — don’t accept the banker’s (or broker’s) analysis of the legal and tax implications.

Is there ever a time when a new tax ID number is required for a trust? Yes, though the circumstances requiring a separate number are not as numerous as most bank officers, brokers and (for that matter) accountants think. These are not the only situations requiring a new number, but the three most common are:

  1. Life insurance trusts, or so-called “Crummey” trusts. Just because your trust owns life insurance it does not automatically follow that this special rule applies, but if it was set up precisely to own life insurance, and you are not the trustee, it likely needs its own number.
  2. A trust that becames irrevocable because of the death of the person setting the the trust up in the first place. This can happen when one spoue dies and a trust becomes partly irrevocable, too.
  3. A special needs trusts you set up (with your money) for the benefit of someone else, but which does not revert to you if the beneficiary dies before you — especially if you are not even the trustee.

When a separate number is required, what kind of number is it? The actual name for a tax identification number for a trust is “Employer Identification Number” or EIN. That is true even though the trust may not have any employees. The common acronym “TIN” (tax identification number) is not really an IRS or Social Security term at all — it is usually used as an umbrella term to encompass both EINs and Social Security numbers.

Why do bankers and stockbrokers insist that I need a new tax ID number if I do not? We’re puzzled, too. Our best answer: they are reading from a prepared list of choices, and they do not really understand the reasoning behind the various categories and approaches. We have had good experience talking with the bank employee on behalf of our clients, but sometimes it requires working up through the levels of authority.

Did you already get an EIN (Employer Identification Number) for your trust? Is that a problem? Probably not. You have two choices: change the tax identification number on all the accounts back to your Social Security number and file a final income tax return for the trust, or file annual tax returns under the trust’s EIN but without including any income or expenses — list those on your own tax return instead.

There is a lot of confusion in the financial industry about tax identification numbers and trusts. Feel free to print this out and take it to your banker.

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