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Filing duties of the family trust


Dear Tax Talk,
My sister and I are co-trustees of our revocable family trust. We have the tax identification number for the trust and we have already made disbursements from it. What forms do we need to file with the Internal Revenue Service for 2003 taxes? Do we have to file for the trust? For the deceased grantor? Do we have to report 1099 for the beneficiaries of the trust? Where do we get the 1099 forms and where do you file them? Whatever advice you can offer is greatly appreciated. Thanks. -- Yvonne

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Dear Yvonne,
Trust taxation is a complex matter and although I can give you some advice, you probably need a tax professional who specializes in this area to get you started in the right direction. You may want to ask the attorney that drafted the trust to recommend a professional competent in trust taxation.

First of all, a revocable trust generally is taxed to the grantor of the trust. The grantor is the person that established the trust and since it is revocable, he has not completed the transfer of the assets and therefore is considered the owner for income tax purposes.

However, as you indicated, the grantor is apparently deceased and therefore the trust may now be irrevocable, requiring the trustees to file a separate income tax return, Form 1041. Depending on the amount of the assets of the decedent, including the trust assets, you may be required to file a Form 706 for the estate. Additionally, a portion of the annual income of the trust may need to be reported on a final Form 1040 for the decedent.

Distributions from a trust may include an element of income earned by the trust, which when distributed is taxable to the beneficiaries. The remainder of the distribution may be considered principal or corpus of the trust and is not taxable to the beneficiaries, since it consists of after-tax dollars of the trust.

A trust is allowed deductions for administrative costs that reduce the amount of income that is considered distributed to the beneficiaries. The taxable portion of a distribution to the beneficiaries is reported on a Schedule K-1. The trustees must provide this form to the beneficiaries in a timely manner so that it can be included on their individual returns. A Schedule K-1 is similar to a Form 1099 in that it reports income.

The beneficiary would include the Schedule K-1 on Page 2 of Schedule E or other parts of their individual return as indicated on the Schedule K-1. In addition, you should file Form 56 with the Internal Revenue Service to advise the agency of your status as trustees.

-- Posted: Jan. 21, 2004




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