Irrevocable Trust Tax Filing Requirements

Does an irrevocable trust have to file a tax return? Yes, it does. According to HG.org Legal Resources, a revocable trust is not meant for tax planning because it remains under the grantor’s control and does not file a separate tax return. Its income is attributed to its grantor, who reports it on their personal income tax return.

But irrevocable trusts are excellent tax planning tools because they're considered to be a separate legal entity. This type of trust must file a separate tax return if certain annual income thresholds are met. The trust document that creates the trust doesn't have to be filed with governmental authorities to obtain legal status so it can help to understand the trust tax requirements and who must file taxes for the type of trust you've created.

A trust is normally considered to be revocable by its grantor unless the trust document states that it's irrevocable. State laws can differ slightly on this point, however.

A trust might be considered irrevocable if its assets are held in the name of the trust itself. For example, the trust may be irrevocable if real estate is titled in the name of the "John Smith Trust Fund" or if cash is kept in a bank account bearing the name of the trust.

Revocable trust assets are typically titled in the trustee's name. They don't remain in the name of the grantor as an individual. You might want to take the trust documents to an attorney or accountant for review to make sure and to avoid legal issues.

The obligation to file an irrevocable trust tax return is triggered if the trust earns any taxable income at all. The IRS states that 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.

But there would be no need to file a trust tax return for a revocable trust. The grantor would account for all the trust’s income and expenses on their own personal tax return.

Trustees must file the IRS Form 1041 if any filing requirement is triggered, even if the trust owes no taxes.

Form 1041 reports trust income, deductions, capital gains and capital losses. It must also report the amount of any employment taxes that were deducted from the pay of 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 six-month filing extension by filing Form 7004.

The trust must file Schedule K-1 if it makes distributions to beneficiaries during the tax year. Schedule K-1 reports all distributions made to beneficiaries and is designed to be used in conjunction with Form 1041. Don't confuse it with the Schedule K-1 that's used with Form 1065, which is meant for reporting a business partnership’s tax information.

Copies of Schedule K-1 must be distributed to every beneficiary who received a distribution from the trust during the tax year.