Know When to File IRS Form 1041 for a Revocable Living Trust

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Even when tax season isn't quite imminent, people who are setting up revocable trusts should know how to handle living trust tax returns and tax ID numbers. The rules for these trusts are pretty simple, at least when compared to the tax requirements for an irrevocable trust. 

Revocable vs. Irrevocable Trusts 

It helps to understand the major distinction between revocable and irrevocable living trusts. When you form an irrevocable trust, you then step aside. You cannot act as trustee. You no longer have any control over the property you've transferred into the trust. It is no longer yours—it belongs to the trust now, and you can't take it back. Thus the name "irrevocable." With very few exceptions, you can't undo this type of trust; it's carved in stone.

For most purposes, you are your revocable trust. You have total control of the assets you place into it. You can take them back into your ownership if you choose. You can sell them or give them away. They remain yours.

This is why your revocable trust is treated much differently at tax time.

Your Revocable Living Trust at Tax Time 

In general, you will not have to file IRS Form 1041, the U.S. Income Tax Return for Estates and Trusts, for your revocable living trust—at least not as long as you're alive and well and serving as its trustee. The trust's tax identification number is your own Social Security number because you still technically own all the assets the trust contains.

All interest, dividends, and other income earned by those assets are reported to the Internal Revenue Service on your tax return. All income earned by your revocable living trust is reported on your personal Form 1040, not on a separate revocable trust tax return. That said, there are a few reasons a separate tax ID number may be required for your revocable living trust. ​

If You Become Mentally Incapacitated

If you become mentally incapacitated, your successor trustee—the individual you've named to step in and assume control of the trust for you if you're no longer capable of managing your affairs—may have to obtain a separate tax ID number for your trust. This separate number is called an " Employer Identification Number," or "EIN" for short.

It will generally depend on the exact circumstances of your incapacity and on who you've named to serve as your successor trustee. They may decide it's necessary to obtain an EIN for your trust so they can best fulfill their fiduciary duties or limit liability for paying your income tax bills. No rule prohibits them from doing so. If they request an EIN for the trust, they must file a separate income tax return for it using Form 1041. This return would be due on the same date as your personal Form 1040.

Sometimes It's Just to Your Advantage 

Your estate planning attorney might determine that it's to your advantage to obtain an EIN for your trust for any number of reasons, and you would then report all its income separately on Form 1041. It can depend on complex personal circumstances. You don't have to report income and losses on your own personal return, and sometimes it can be better not to do so, but you'll pay any taxes due, all the same—either personally or out of trust coffers. 

If you need an EIN for your revocable living trust, you can obtain one online by using the IRS EIN Assistant. Confer with an estate planning attorney first, however, to ensure that doing so is in your best interests. Otherwise, the time and effort spent might complicate your life at tax time.