A trust and FBO are terms that tend to go hand in hand. And the latter is a legally recognized term that means “for the benefit of.” It is an acronym that tends to appear when there is a designated beneficiary of some kind, especially within living trusts.
An Introduction to Living Trusts
Different trust funds exist, with a living trust being one of them. You may have heard people refer to these trusts as revocable trusts.
If you are a grantor, you can create a living trust as a legal entity to own your assets, such as real estate, vehicles, valuable jewelry, etc. during your lifetime for your benefit by naming yourself as the trustee. But you also get to specify where those things you own within the trust will go when you die.
The beauty of the living trust is that it is revocable. That means you can change it or the details associated with it when your circumstances change. For example, if you create a revocable trust and designate your spouse as the beneficiary upon your death or co-trustee, you could cancel it or change it if you find out that person is cheating and you obtain a divorce.
In addition, revocable trusts do not need to undergo a court process when the grantor dies, unlike wills. So, the beneficiaries get what is due to them faster.
One can also name a successor trustee who will handle their assets when they die or become incapacitated. That entity will be responsible for ensuring your beneficiaries get your assets upon your passing or managing your properties on your behalf when you are unable to.
It is worth noting that you don’t need to have a separate tax identification number (TIN) for a living trust. However, if you are the grantor and you pass on, the trust will need an (Employer Identification Number) EIN for tax payments.
An Introduction to Irrevocable Trusts
Irrevocable trusts, unlike their revocable counterparts, will prevent you from modifying or canceling them without meeting specific conditions and obtaining the court’s approval. However, as a grantor, when you cede the rights to your assets within the trust, you also enjoy less personal tax liability.
Due to the nature of irrevocable trusts, it is legally considered an independent entity with a unique tax identification number (EIN). The trustee you appoint to manage the trust will pay for any taxes it owes from the trust funds.
Trusts and FBO
While FBO is a term commonly used in living trusts, it applies any time you create any trust that is meant for one or more beneficiaries. And those beneficiaries could be individuals or organizations.
It is also worth noting that FBO trusts must have a trustee to manage the existing assets and provide value to the beneficiaries. And the tax filing process depends on the type of FBO trust you create.
FBOs and Taxes: How to File Taxes on an FBO Trust
Below are the tips you should implement to file taxes on an FBO trust.
The first order of business is to locate or create a tax identification number. If the grantor is still alive, their Social Security Number is the TIN or Individual Taxpayer Identification Number (ITIN).
If the trust is irrevocable or the grantor of the revocable trust is dead, you must create an EIN via the IRS website. It’s relatively easy to fill out an online form and apply for the TIN, which you will receive in minutes. However, be prepared to provide all the relevant details, such as the trustee’s name and SSN. However, if you opt to apply via mail or fax, the information may take up to four weeks to arrive, and you must use Form SS-4 to apply.
If you are an international applicant, you could also use the number 267-941-1099 from 6 a.m. to 11 p.m. (Eastern Time) Monday through Friday to obtain your EIN. Please note the number is not toll-free.
If you are dealing with an irrevocable trust and have no idea where to find the EIN, you can contact the bank or agency where you have an account or obtain a license and ask for the number. Also, you can reach out to the IRS via the phone number 800-829-4933. The hours are from 7 a.m. to 7 p.m. local time, Monday through Friday, and request help on the matter.
Obtain Form 1041 instructions, to determine how you should file taxes on an FBO trust.
Get a copy of Form 1041 from the IRS website and fill in the details. You may need to attach other documents to help you provide all the relevant information. And these may include Form 4797 for capital gains or losses, Form 4952 for interest and Form 1116 for foreign tax credits, among others.
Include allowable deductions available for the trust. These may depend on the assets within it. And they may include real estate fees, investment management charges, tax-exempt income, charitable contributions and business losses.
Always verify that the information you provide is correct and that you have followed the IRS instructions to the letter.
File the return electronically via the e-File (MeF) platform or by mail. The address to which you send the form depends on your filing method and place of residence.
Attach Schedule K-1 and distribute it to the trust’s beneficiaries.
Final Notes About Trust Tax Filing
Remember, a living trust does not need to file separate taxes. The grantor is responsible for them and can account for all allowable expenses and income in their own Form 1040. However, upon their incapacitation or death, or when dealing with an irrevocable trust, you must file taxes when the entity earns $600 or more in income or if one of the beneficiaries is a non-resident alien.
It is also worth noting that a trust’s beneficiaries must include Schedule K-1 to separate their trust income streams when filing their own Form 1040s. So, ensure they receive it by the due date associated with Form 1041. But if you struggle to file taxes associated with the trust, it would be best to consult tax professionals to do the job for you.
- Schwab: What Is a Living Trust? Do You Need One?
- LegalZoom: What Is a Living Trust?
- NOLO: Living Trust FAQ
- Policy Genius: What is an irrevocable trust and how does it work?
- IRS-Taxid-Numbers: Obtain a Trust Tax ID (EIN) Number | Online EIN Application
- IRS: How to Apply for an EIN
- IRS: Lost or Misplaced Your EIN?
- IRS: 2020Instructions for Form 1041 and Schedules A, B, G, J, and K-1
- IRS: Modernized e-File (MeF) Internet Filing
- IRS: "Where To File Your Taxes" for Form 1041
- Completing a Form 1041 is a complicated process, as the form and instructions for completion are long and cumbersome. A trustee without experience in tax law and preparation would be wise to outsource preparation of Form 1041 to a tax professional. Trust tax laws are constantly changing, and a tax professional will have the most current software to complete and file the return.
- When the trust completes its tax return Form 1041, IRS Schedule K-1 generates to beneficiaries who have received money or assets from the trust. The beneficiaries, in turn, use the Schedule K-1 to file any personal federal and state income tax that may be due. Since the beneficiaries cannot file personal income tax returns until the trust return is completed, it is critical to complete Form 1041 as soon as possible. Beneficiaries tend to get very upset if they do not receive timely tax forms from a trust.
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