EINs for trusts - annual tax implications

[donheff]

DW and I recently updated our estate plan and set up a joint revocable trust for our house and taxable accounts. When we moved our joint brokerage account into the trust, Vanguard offered to apply for an IRS Employer Identification Number (EIN) for the trust. IRS sent a confirmation, noting that all future dealings with them on the account should reference the name and EIN they registered and also noting that we should file a Form 1041 next 4/15.

The IRS letter made me realize that I don’t know how this EIN will affect our annual tax filing. I assumed we would report dividends and CGs the same way we always have but...? Will we need to account for the trust earnings differently? Will Vanguard and TurboTax make it easy or is it a PITA?

 

[pb4uski]

Dunno. My parents each had trusts and we didn't have an EIN for the trusts until dad died... from then forward the trust used the EIN rather than his SS#. Mom's trust has no EIN and still reports everything under her SS#.

I don't see a lot of benefit to the trusts compared to beneficiary designations now that the estate tax exemption is so high.

 

[OldShooter]

Talk to your estate planning attorney. Our instructions were to supply our SSNs if anyone involved with our rev trusts asked for an indentifier. If you have testamentary irrev trusts they will have to get EINs at the time they are funded. Your SSNs die with you.

What you did/what VG did is probably a mistake, hopefully fixable. Your attorney will know. That's why he/she makes the big bucks.

 

[ChrisC]

Don’t think you need an EIN for a revocable living trust. Vanguard must have thought you established an irrevocable, non-grantor trust, in which case, you do need a separate EIN because it’s not pass-thru legal entity of you and your wife.

We have a revocable living trust for my wife and I, which uses our SS number for tax reporting purposes and we file taxes and report income on personal returns. We also administer an irrevocable, non-grantor trust, set up for MIL before she passed and this required a separate EIN, separate Federal trust (1041) and state returns , and has a different tax rate than personal returns.

I don’t know how you unwind what has been done in your case as it seems that an EIN should not have been applied for your trust, unless we’re missing something here.

 

[ERD50]

Don’t think you need an EIN for a revocable living trust. Vanguard must have thought you established an irrevocable, non-grantor trust, in which case, you do need a separate EIN because it’s not pass-thru legal entity of you and your wife.

We have a revocable living trust for my wife and I, which uses our SS number for tax reporting purposes and we file taxes and report income on personal returns. We also administer an irrevocable, non-grantor trust, set up for MIL before she passed and this required a separate EIN, separate Federal trust (1041) and state returns , and has a different tax rate than personal returns.

I don’t know how you unwind what has been done in your case as it seems that an EIN should not have been applied for your trust, unless we’re missing something here.

Yes to this and the previous posts. We have revocable trusts, my parent's and MIL/FIL's revocable trusts were all the same - everything references your SSN, the EIN is applied for at death of the final successor trustee. Your SSN dies with you.

Check with your Estate Attorney, but I'm guessing you won't have to unwind anything - as long as no 1099 was sent to the IRS with that EIN, just use the SSN of the person who is the trustee of that trust. But if a 1099 was issued with the EIN, the IRS is going to expect to see a matching 1041.

-ERD50

 

[Montecfo]

The EIN does not change the tax status of the trust. It could create some confusion if you file a 1041 for the trust which would normally be under the beneficiary's tax ID number.

I would ignore the new number for now. If there is an IRS inquiry, simply respond to state the number was applied for in error.

 

[donheff]

Talk to your estate planning attorney. Our instructions were to supply our SSNs if anyone involved with our rev trusts asked for an indentifier. If you have testamentary irrev trusts they will have to get EINs at the time they are funded. Your SSNs die with you.

What you did/what VG did is probably a mistake, hopefully fixable. Your attorney will know. That's why he/she makes the big bucks.

Don’t think you need an EIN for a revocable living trust. Vanguard must have thought you established an irrevocable, non-grantor trust, in which case, you do need a separate EIN because it’s not pass-thru legal entity of you and your wife.

We have a revocable living trust for my wife and I, which uses our SS number for tax reporting purposes and we file taxes and report income on personal returns. We also administer an irrevocable, non-grantor trust, set up for MIL before she passed and this required a separate EIN, separate Federal trust (1041) and state returns , and has a different tax rate than personal returns.

I don’t know how you unwind what has been done in your case as it seems that an EIN should not have been applied for your trust, unless we’re missing something here.

After I got the IRS letter, I read a law article that advised that applying for an EIN was not necessary for a revocable trust but is advised since your heirs will otherwise have to get one after your death. Vanguard told me it was optional but advised when they offered to apply. The estate planning attorney told me to keep it with my estate planning documents and he kept a copy in his online repository.

The EIN does not change the tax status of the trust. It could create some confusion if you file a 1041 for the trust which would normally be under the beneficiary's tax ID number.

I would ignore the new number for now. If there is an IRS inquiry, simply respond to state the number was applied for in error.

From the little I have read, I suspect this is the situation. The IRS letter is probably generic and the 1041 won't come due until death but that mention is what prompted my question. I was hoping that, among our folks, some were already in this situation and could advise from experience.

 

[Dtail]

My parents have an irrevocable trust. These trusts need an EIN number, but not the revocable trusts.
Have you checked out the tax rates for trusts?

 

[ERD50]

After I got the IRS letter, I read a law article that advised that applying for an EIN was not necessary for a revocable trust but is advised since your heirs will otherwise have to get one after your death. Vanguard told me it was optional but advised when they offered to apply. The estate planning attorney told me to keep it with my estate planning documents and he kept a copy in his online repository.



From the little I have read, I suspect this is the situation. The IRS letter is probably generic and the 1041 won't come due until death but that mention is what prompted my question. I was hoping that, among our folks, some were already in this situation and could advise from experience.

OK, so apply for it in advance, and don't use it until death - I guess that makes sense. Just make sure Vanguard doesn't mistakenly use the EIN in place of SSN!

It's pretty easy to get an EIN online, but it's one more tedious thing for the survivors to deal with, and they already have enough on their hands. I'll look into this ofr our trusts, and keep the paperwork in a good place.

And while I just said it's 'pretty easy' to get an EIN on line, when I did it for MIL, I was scratching my head. The form is used for many, many different things, most of them having to do with a business that needs a tax ID, or employees w/o SSNs, etc. So what should be a simple form to fill out, I found quite baffling. IIRC, one point of confusion was a "creation date" - is this the date the trust was written/signed (and is used for reference: John Doe Revocable Trust UDA 01/01/2001)? No, it was the date of death, as that is what creates the irrevocable trust. I had trouble finding specifics on-line, just "fill out the form".

I finally decided to relax, it probably makes zero difference if I did it wrong or not. As long as the 1099's get issued under the EIN, and I file a 1041 for that EIN and declare all those 1099's, the IRS is satisfied and no one will ever look/care about anything else on that form. But it bugs me they can't just provide a dead-simple (pun intended) set of instructions for a very common use.

-ERD50

 

[ERD50]

My parents have an irrevocable trust. These trusts need an EIN number, but not the revocable trusts.
Have you checked out the tax rates for trusts?

The revocable trust just falls under the trustees taxes, the 1099's have your SSN on them, and there is zero difference in taxes while alive.

At death, they become irrevocable, and then are taxed at estate/trust rates (higher rates, lower thresholds).

-ERD50

 

[socca]

OK, so apply for [EIN] in advance, and don't use it until death - I guess that makes sense. Just make sure Vanguard doesn't mistakenly use the EIN in place of SSN!

Can Vanguard's software associate a EIN with a revocable trust brokerage account but not actually use it when generating a 1099 for the account? For the OP's sake I hope so, but call me skeptical. I don't remember whether VG tried to cajole me into getting a EIN for the revocable trust brokerage account I created there a couple of years ago, but I emphatically would have said NO if offered!!!

Generating and filing a federal 1041 (and the associated trust state tax return, if applicable) is a PITA. You can't use TurboTax to generate a 1041, but there is business tax prep software available if you want to do it yourself (e.g. from Intuit and H&R Block). I've never done this, and wouldn't try it for the two irrevocable trusts I manage - much too complex. The trusts pay a CPA to generate their federal and state tax returns.

OP: Sorry you wandered down this rabbit hole!

 

[pb4uski]

After I got the IRS letter, I read a law article that advised that applying for an EIN was not necessary for a revocable trust but is advised since your heirs will otherwise have to get one after your death. Vanguard told me it was optional but advised when they offered to apply. The estate planning attorney told me to keep it with my estate planning documents and he kept a copy in his online repository. ....

OK, so apply for it in advance, and don't use it until death - I guess that makes sense. ...

I dunno. When my Dad died it took me about 10 minutes to get online, apply for an EIN for the trust and get the result. Must be that he never got one in anticipation because I have yet to find it!

Seems like it could create more confusion if it isn't clearly documented and the successor trustees apply for another one.

 

[ChrisC]

Generating and filing a federal 1041 (and the associated trust state tax return, if applicable) is a PITA. You can't use TurboTax to generate a 1041, but there is business tax prep software available if you want to do it yourself (e.g. from Intuit and H&R Block). I've never done this, and wouldn't try it for the two irrevocable trusts I manage - much too complex. The trusts pay a CPA to generate their federal and state tax returns.

OP: Sorry you wandered down this rabbit hole!

Going down the rabbit hole with you now, I think using a CPA for filing the 1041 (and state returns) depends on the complexity of the trust, its expenses and disbursements. We administer an irrevocable trust, with few expenses, no current disbursements to K-1 beneficiaries (my BIL and grandchildren of MIL), and no significant income -- income is below the level where trust income taxes would bite you badly. First two years, I used 1041 tax software from TaxAct, which cost $97; this year, I wanted to make sure I didn't miss anything so I used a CPA (a new guy for us, who also handled our personal and LLC/partnership returns, after a long time CPA of ours retired). Basically, no difference in filing the 1041 returns from prior years.

But with the CPA, I'm buying some peace of mind and tax filing insurance with him -- so it's worth the modest fee we pay him for the 1041. In the future, this return will likely become more complex, as we will likely be making greater disbursements and incurring more significant expenses, so it's good to have this CPA on board for us.

 

[donheff]

Thanks for all the cautions. IRS had a number to call on the letter and yes, indeed, if I earned over $600 I would have to file trust tax returns every year. How you coordinate that with your personal return is not something I want to learn about. I called Vanguard and they were able to switch me back to reporting dividends and CGs of the trust account under my SSN. I'm not happy with Vanguard. They should have forewarned me of the implications of what they were recommending. I would have elected to skip the EIN for now.

 

[SecondCor521]

Thanks for all the cautions. IRS had a number to call on the letter and yes, indeed, if I earned over $600 I would have to file trust tax returns every year. How you coordinate that with your personal return is not something I want to learn about. I called Vanguard and they were able to switch me back to reporting dividends and CGs of the trust account under my SSN. I'm not happy with Vanguard. They should have forewarned me of the implications of what they were recommending. I would have elected to skip the EIN for now.

It sounds like from others on this thread that sometimes trusts are separate entities and sometimes they aren't. That sounds right; I'm no expert.

In your case it sounds like your trust isn't separate, so it all gets reported on yours.

If it were separate, then what the IRS said would apply. The trust would have to have filed its own tax returns, with its own income and deductions. It would not be coordinated with your own tax return unless you were a beneficiary and the trust made an earnings distribution. It would then issue a K-1 to you and that income would essentially be transferred from the trust tax return to your tax return.

(The $600 amount is essentially the standard deduction for certain kinds of trusts. For other kinds of trusts, I believe it is $100.)

I would not generally rely on Vanguard for tax advice, and I'm surprised they got involved in the EIN. At this point, since you haven't filed any trust tax returns and don't intend to, the fact that there is an EIN out there that isn't getting used is - I think - not a big deal.

 

[Rambler]

Thanks for all the cautions. IRS had a number to call on the letter and yes, indeed, if I earned over $600 I would have to file trust tax returns every year. How you coordinate that with your personal return is not something I want to learn about. I called Vanguard and they were able to switch me back to reporting dividends and CGs of the trust account under my SSN. I'm not happy with Vanguard. They should have forewarned me of the implications of what they were recommending. I would have elected to skip the EIN for now.

Exactly, which is one reason I convinced my parents to not go down the “trust” road. Dad had decided one day, after going to a seminar on trusts” that he and mom needed one. They don’t really have that much that they need to be concerned with a trust...Anyway, he decided that he could do it himself, without legal assistance, and wrote up the trust. Anyway, I finally convinced him that he’d have to get it done properly and it would cost him $$$, and that he’d have to get an EIN for it and file returns for it every year. My folks both grew up pretty poor, and are so focused on protecting what they have from legal costs, taxes, so that every penny of their assets go to heirs instead of those costs, that they miss the fact that “protecting” those assets via a trust also comes with some costs...some that recur annually (preparing Tax returns), especially since they had already divided their cash assets into accounts that are payable on death to specific heirs. The only real asset they have besides that cash is their very modest house...not exactly an asset requiring a trust.

 

[ERD50]

Exactly, which is one reason I convinced my parents to not go down the “trust” road. Dad had decided one day, after going to a seminar on trusts” that he and mom needed one. They don’t really have that much that they need to be concerned with a trust...Anyway, he decided that he could do it himself, without legal assistance, and wrote up the trust. Anyway, I finally convinced him that he’d have to get it done properly and it would cost him $$$, and that he’d have to get an EIN for it and file returns for it every year. My folks both grew up pretty poor, and are so focused on protecting what they have from legal costs, taxes, so that every penny of their assets go to heirs instead of those costs, that they miss the fact that “protecting” those assets via a trust also comes with some costs...some that recur annually (preparing Tax returns), especially since they had already divided their cash assets into accounts that are payable on death to specific heirs. The only real asset they have besides that cash is their very modest house...not exactly an asset requiring a trust.

Much of what you said is not true, at least as I understand it, and in my experience.

As discussed earlier, a revocable ("living") trust does not need its own EIN until the trustee(s) die. There is no separate tax return to file, the 1099s from a trust are reported with the regular 1040 like any other 1099. The only difference is they will be titled as "Jane Doe REVOC Trust dated 01/01/2000" or whatever.

A revocable trust provides no protections that I know of. Some will disagree with me, but I don't think you need a 'pro' to set up a revocable trust. They are not rocket science. Despite that, I've seen some awful trusts written by "pros". But the other things, Power of Attorney, Health Care directives, etc that are part of planning - those might be trickier, and probably best to get some experienced help with.

But if they were looking at an irrevocable trust, yes, then it is a separate entity, with some protections, and with some costs/complexity and its own tax filing and estate tax rates. I would not even think about a irrevocable trust w/o some pro help that I could verify were real pros.

-ERD50

 

[CRLLS]

Having an attorney creating or modifying a trust or will is no guarantee that things are done properly. We were recently reviewing MIL's documents and found that during an update of wills and trusts, the attorney referenced trust names that were not the official names of the trusts. That was over 10 years ago. It took some effort on our part to convince MIL that the documents needed to be corrected. Also an effort on our part to prevent the attorney from billing us for the work he had to do to correct his previous error.

These documents are a learning experience for sure. The more "YOU" know, the better the chance of having what you intend happening, actually is done when you are gone.

I might add that having most things in trust (or with POD & TOD beneficiaries) can simplify the process of finalizing a parent's financial and legal situation. Being able to file a Small Estate Affidavit can avoid probate and keep things out of public knowledge.

 

[CaliKid]

You should not have gotten an EIN. It's not necessary until after death.
Should have left accounts in your SSN.

However, it's a minor deal. Just file one 1041 saying the income will be reported on your 1040 going forward. Minor issue but Vanguard should not have done that.

 

[donheff]

You should not have gotten an EIN. It's not necessary until after death.
Should have left accounts in your SSN.

However, it's a minor deal. Just file one 1041 saying the income will be reported on your 1040 going forward. Minor issue but Vanguard should not have done that.

+1 This.

 

[OldShooter]

Having an attorney creating or modifying a trust or will is no guarantee that things are done properly. ...

Sadly this is true. The odds are strongly in your favor if you do some due diligence but, as is usually true in life, there are no guarantees.

DW used to occasionally come home from the Megbank Trust Department fuming about bad documents that had been drafted by one of two allegedly trust & estate specialist attorneys she knew well for incompetence. Bad documents were common from generalist attorneys.

Much of what you said is not true, at least as I understand it, and in my experience.

+100 @Rambler's post is best ignored.

... I don't think you need a 'pro' to set up a revocable trust. They are not rocket science. Despite that, I've seen some awful trusts written by "pros". But the other things, Power of Attorney, Health Care directives, etc that are part of planning - those might be trickier, and probably best to get some experienced help with.

But if they were looking at an irrevocable trust, yes, then it is a separate entity, with some protections, and with some costs/complexity and its own tax filing and estate tax rates. I would not even think about a irrevocable trust w/o some pro help that I could verify were real pros. ...

All of this is part of a good estate plan. Going to an attorney with home-made pieces may end up costing you more than just having his assistant's word processor spit out what you need. The problem is that, despite the internet, you cannot know what you do not know.

... Just file one 1041 saying the income will be reported on your 1040 going forward. ...

I disagree. I have a strong policy to avoid waking sleeping bears. You just can't know what will happen. I would simply ignore the existence of this superfluous EIN. Forever. If the IRS inquires, which is almost zero likelihood, just answer that the EIN was obtained in error and you will not be using it. No more explanation. Bear goes back to sleep.

 

[SecondCor521]

I would simply ignore the existence of this superfluous EIN. Forever. If the IRS inquires, which is almost zero likelihood, just answer that the EIN was obtained in error and you will not be using it. No more explanation. Bear goes back to sleep.

+1. In addition, I don't think there is such an option on the 1041 form to do as suggested.