How to File an Irrevocable Trust With the IRS
An irrevocable trust is a separate taxable entity. It is distinguished from what are called "grantor trusts," the income of which flows through to the grantor's individual tax return. To qualify as an irrevocable trust, the grantor must surrender ownership of all assets transferred to the trust, and they cannot be titled in his name. Though there are no formal requirement to file any forms with the IRS to create an irrevocable trust, for tax purposes it must have its own federal tax identification number and returns must be filed annually if it generates income.
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Instructions
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Apply for FEIN. The IRS provides several methods by which a trustee can apply for a tax ID number for an irrevocable trust. The easiest is probably to complete the interview-style application on the IRS website (see Resources below). Otherwise, the filing of Form SS-4 is required. In either case, the necessary information includes the legal name of the trust, the name of the trustee, contact information for the trust (address and phone number) and the types of business activity in which the trust will engage. The trustee will have to provide his Social Security number, or, if a corporation, its own tax ID.
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Compute annual income tax liability. A trust computes its income tax liability the same way an individual or business does, and is allowed most of the same credits and deductions. The tax rates on trusts, however, is a hefty 39.6 percent of all income more than $8,650. The appropriate form to file is Form 1041, U.S. Income Tax Return for Estates and Trusts. A return is only necessary for a irrevocable trust in years in which it generated more than $600 in income, or during which it had a non-resident alien as a beneficiary.
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Complete Schedule K-1. Because of the high tax rate on irrevocable trusts, most distribute their income to beneficiaries each year, who are then taxed at their individual rate. An irrevocable trust is required by the IRS to prepare and file a Schedule K-1, detailing all income distributed by the trust to the beneficiaries. This is helpful in clarifying for the beneficiaries what they must declare as trust income on their individual returns, and makes it easier for the IRS to verify that the income is in fact claimed on the beneficiaries' returns.
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Declare charitable donations, if any. A trust that makes contributions to qualified charities and therefore seeks a deduction on its income is considered a "complex trust" by the IRS and is required to file a Form 1041-A, U.S. Information Return for Trust Accumulation of Charitable Amounts.
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Tips & Warnings
Irrevocable trusts generally do not provide an income tax savings, unless their income is substantial and distributed over enough beneficiaries as to not lift any of them into a higher tax bracket. The primary benefit of an irrevocable trust is asset protection, since because the assets no longer belong to the grantor, they cannot be attached by his creditors.
The IRS is very wary of fraudulent trust schemes aimed at evading income tax. It is highly recommended to consult with an attorney or certified accountant in the creation of an irrevocable trust, and ensure that the intended activities of the trust do not constitute fraud according to the Internal Revenue Code.
