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By a defective trust, I mean a trust that meets the definition of a trust for estate tax purposes but not income tax purposes.

Consider an irrevocable defective trust that is setup without going to court and without getting a separate EIN number for the trust. It also has only one beneficiary.

It was setup to be taxed as a grantor trust and it has been reporting its income to the IRS using the grantor's social security number. When the grantor dies, can it report its income to the IRS under the beneficiaries social security number?

It seems to me that this should be specified in the trust documents but suppose it is not.

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  • Such a trust was setup for me. I was advised by an attorney, who is an associate of the attorney who setup the trust, that the trust can report under my social security number since both my parents are dead. Is the attorney wrong?
    – Bob
    Aug 9, 2023 at 22:46

2 Answers 2

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When the grantor dies, can it report its income to the IRS under the beneficiaries social security number?

No.

After the grantor dies (or whenever the trust becomes a non-grantor trust for any reason, even if the grantor does not die), the trust needs to apply for a tax ID number from the IRS like any other newly created irrevocable trust. After the death of the grantor, the trust would also need to file IRS Form 1041 each year to report its income and, if taxes are due, to pay taxes upon that income.

At that point it is taxed either as a "simple trust" or a "complex trust" under the Internal Revenue Code, depending upon the terms of the trust. A trust with only one possible beneficiary that is required to distribute all of its income currently is a "simple trust", while other trusts are "complex trusts". A simple trust basically just allocates all of its income and expenses every year to the beneficiary, although there is more nuance than that. In a complex trust, in essence, undistributed income is taxed to the trust at highly compressed marginal tax rates, and distributed income is taxed to the beneficiary who receives it, in amounts set forth on Schedule K-1 which the trust provides to the beneficiaries who received distributions.

The main exception to this rule would be in a very odd intentionally defective grantor trust in which, upon the grantor's death, the beneficiary received a general power of appointment over the trust assets (i.e. the authority to make distributions of trust property to the beneficiary, the beneficiary's creditors, the beneficiary's estate, and/or the creditors of the beneficiary's estate without being subject to any ascertainable standard deviation from which would be breach of a fiduciary duty to someone). In that case, it would become a grantor trust in which the beneficiary was deemed the grantor and in that case it would use the beneficiary's Social Security number.

This would be very odd because a trust that gives a beneficiary a general power of appointment is barely a trust at all. Normally, trusts simply provide that at some point the property of the trust shall be distributed outright to a beneficiary, rather than keeping the trust in existence but giving the beneficiary a general power of appointment over its property.

It seems to me that this should be specified in the trust documents but suppose it is not.

This would rarely be specified in the trust documents, because this requirement cannot be altered or adjusted from the statutory mandate. Generally, trust documents set forth only aspects of trust governance that the drafter has the authority to control or dictate.

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No, after the grantor's death, the IDGT becomes a regular trust. Distribution can be dictated by the trust, but how the trust is taxed is dictated by tax law. Income distributed to the beneficiaries is taxable to the beneficiaries, but income retained by the trust is taxable to the trust.

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  • Are you saying that there is no way to have an IDGT report its income under the beneficiaries Social Security number after the grantor(s) die?
    – Bob
    Aug 9, 2023 at 2:59
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    @Bob after the grantor dies it is no longer IDGT, it's just a trust. It becomes its own entity for tax purposes just like any grantor trust when the grantor dies.
    – littleadv
    Aug 9, 2023 at 3:17

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