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A Primer
As estate and tax planners, we are very much aware of the virtues of grantor trusts, but how often do we consider the mechanics of reporting the income of a grantor trust? Although grantor trusts are ignored for the purpose of calculating taxable income, they are not ignored for the purpose of reporting such income. There are complex reporting requirements that we, as advisors, should understand when advising clients to use grantor trusts.
What is a grantor trust? The most common form of a grantor trust is a revocable trust funded by the grantor during his or her lifetime. Grantor trusts, however, can arise in a number of common planning techniques including irrevocable life insurance trusts, intentionally defective grantor trusts, and grantor retained annuity trusts. A grantor trust is a trust to which at least one of the provisions of IRC §§ 671-679 applies. If any of IRC §§ 671-677 or 679 applies, then the "grantor" is required to include all items of the trust's income, deduction, and credit on his or her personal income tax return. If IRC § 678 applies and a beneficiary is deemed to be the grantor of the trust for income tax purposes, that beneficiary must similarly report the items taxed to the trust on his or her personal income tax return. The goal of this article is to provide a primer on grantor trust income tax reporting. This article will not delve into the ways to create a grantor trust but will assume that the advisor has already made a determination that the trust in question is a grantor trust.
Taxable Year
IRC § 644(a) requires all trusts to use a calendar year for reporting purposes. But a wholly owned grantor trust (that is, the entire trust is deemed to be owned by one person) is exempt from this requirement and must use the same taxable year and accounting method of its grantor. Therefore, a wholly owned grantor trust may use a fiscal year for its tax return filings if the grantor is on a fiscal year.
General Reporting-Form 1041
Grantor trusts are subject to the same reporting requirements as nongrantor trusts. IRC §§ 6012(a) (4)-(5) require trusts with taxable income of any amount, gross...