What is a Trust Tax Return?

Marsha A. Tisdale

In the United States, a trust tax return is a return that must be filed for a trust and is separate from an individual’s return. The trust return will affect the personal return because it generates a form called a K-1 that will show income that will need to be included on the individual’s return. There are, therefore, two distinct and separate tax returns: one for the trust and one for the individual. In the United States, this return is filed on Form 1041 and the personal tax is filed on Form 1040.

Trust tax returns should be filed using Form 1041 as opposed to Form 1040, which is for individual income tax only.
Trust tax returns should be filed using Form 1041 as opposed to Form 1040, which is for individual income tax only.

A trust is a separate entity from the individual who files a personal income tax return. It is most likely the beneficiaries who will need to address the income they receive from the trust. The trust tax return, therefore, will need to be filed prior to a beneficiary’s personal income tax return so that he or she will have the K-1 information.

Basically, a trust is a separate entity subject to income tax that is set up to control assets. There are four requirements for a trust: a grantor, assets, a trustee, and one or more beneficiaries. The assets in a trust are managed by an independent person, called the trustee, on behalf of the beneficiary or beneficiaries of the trust.

The grantor is the person who originally sets up the trust and turns over the assets to the trust. Assets can be real estate, personal property, money, stock or security, or anything that can be of value. Beneficiaries are people who will benefit or receive payments from the trust. A trustee is the person who controls trust assets and distributes these assets or earnings to the beneficiaries.

Taxes are required to be paid on any income generated from trust assets. A trust tax return in the United States is filed on form 1041. The trustee or fiduciary is the one responsible for filing the return. Taxable income will be shown on the K-1 form that will be generated and provided to the individual beneficiaries.

Before a trust tax return is prepared, the trustee or fiduciary must determine the gross income for the trust. This is done in a manner similar to figuring individual income taxes. Many of the deductions and credits allowed on an individual’s return can also be used on a trust tax return. In addition, a trust is allowed a deduction for the amount distributed to beneficiaries. Any income distributed from the trust to the individual will be taxable on the individual’s personal income tax return.

The two major types of trusts are revocable and irrevocable trusts. A revocable trust, sometimes called a revocable living trust, is in effect during the lifetime of the grantor. The grantor may at anytime revoke or change the instructions or format of the trust. Irrevocable trusts cannot be changed and are often set up as a form of tax and estate planning to protect assets from being taxed with the estate of an individual when he or she dies. Most revocable trust will automatically change over to an irrevocable trust when the grantor dies.

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