Answer: If the trust is a revocable (or living) trust, then the income that is generated is simply reported on the Settlor’s individual income tax return during his life. Upon the Settlor’s death, the revocable trust becomes irrevocable and becomes a separate entity for tax purposes. Once a trust is irrevocable, any income that is trapped in the trust (not distributed to a beneficiary) is generally reported on a fiduciary income tax return (Form 1041). Generally, to the extent income is passed out to a beneficiary, that income is reported on the beneficiary’s individual income tax return. However, if the trust is a simple trust (meaning a beneficiary is required to receive all of the income of the trust under the terms of the document), then the income is reported on the beneficiary’s income tax return. There are other types of trusts (irrevocable trusts established during the life of a grantor/settlor, grantor trusts, etc.) which have various tax treatments. In order to determine the proper tax treatment, the trust agreement must be reviewed.
NOTE: The information provided above is not intended to be nor should be relied upon as legal advice. Peck Bloom, LLC is located in the State of Illinois and the attorneys are only licensed to practice law in Illinois and Florida. You should consult a qualified attorney licensed in your state regarding these matters.
To locate experts in your state who can help you with this elder care matter, go to: www.ElderCareMatters.com/statechapters.htm
Kerry R. Peck, Managing Partner
Peck Bloom, LLC
Chicago, Illinois 60603
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