A revocable trust does not file a separate tax return--its income is attributed to its grantor, who reports it on his personal income tax return. An irrevocable trust is considered to be a separate legal entity, however, and must file a separate tax return if certain annual income thresholds are met. The trust document that creates the trust need not be filed with governmental authorities to obtain legal status.
Normally, a trust is considered revocable by its grantor unless the trust document states that it is irrevocable. State laws differ on this point, however. A trust might be considered irrevocable if its assets are held in the name of the trust itself rather than in the grantor's name--if, for example, real estate is titled in the name of the "John Smith Trust Fund," or if cash is kept in a bank account named after the trust.
The obligation to file a trust tax return is triggered if the trust earns any taxable income at all. Even if all of the trust's income is nontaxable, it must file a return if it earns at least $600 during the tax year, or if any of the beneficiaries is a nonresident alien. It is the trustee's obligation to file this return, not the grantor's.
Trustees must file Form 1041 if any filing requirement is triggered, even if the trust owes no taxes. Form 1041 reports trust income, deductions and capital gains and losses. Form 1041 must also report the amount of any employment taxes that were deducted from the pay of any household employees employed by the trust. The filing deadline is April 15 or the next business day thereafter, although the trust may receive an automatic five-month filing extension by filing Form 7004.
Schedule K-1 and Distributions
If the trust makes distributions to beneficiaries during the tax year, it must file Schedule K-1. Schedule K-1 reports all distributions made to beneficiaries and is designed to be used in conjunction with Form 1041 (do not use the Schedule K-1 that is used with Form 1065.) Copies of Schedule K-1 must be distributed to every beneficiary who received a distribution from the trust during the tax year, so that he can report it as personal income on his 1040 tax return.
- Cornell University Law School: U.S. Code: Estates, Trusts and Beneficiaries
- IRS: Instructions for Form 1041
- IRS: Schedule K-1 (Form 1041); 2010
- IRS.gov. "Basic Trust Law." Accessed Aug. 29, 2020.
- IRS. "Tax Forms and Instructions, Tax Rate Tables," Page 10. Accessed Aug. 30, 2020.
- IRS. "IRS provides tax inflation adjustments for tax year 2020." Accessed Aug. 30, 2020.
David Carnes has been a full-time writer since 1998 and has published two full-length novels. He spends much of his time in various Asian countries and is fluent in Mandarin Chinese. He earned a Juris Doctorate from the University of Kentucky College of Law.