When a grantor in a trust -- the creator of a trust -- is alive, he pays taxes on any taxable trust activities, but when he dies, beneficiaries pay tax on the trust distributions. Because the individual affairs of the grantor and the trust are treated differently, the Internal Revenue Service must have a way of identifying the two. A tax ID allows the IRS to distinguish between the grantor’s final income tax return and the affairs of the trust.
Understanding Grantor Trusts
A grantor trust is also known as a revocable trust. The grantor creates the trust and is allowed to amend or revoke the trust at any time. The grantor manages the assets of the trust, similar to the way an individual manages his own income and assets. Grantors name the beneficiaries who will receive trust assets, and because the trust is revocable, the grantor can change beneficiaries, trustees and asset assignments whenever he wishes to.
Grantor Trust Tax Reporting
The income and assets of most grantor trusts are reported on the individual tax return of the grantor. The IRS does not require grantors to obtain a separate Employer Identification Number for a revocable trust because all trust activity is reported under the grantor’s Social Security number. However, a grantor trust may apply for a trust tax ID number. If a grantor decides to do this, the activities of the trust must be reported on IRS Form 1041, instead of on the grantor’s 1040 form. Applying for a EIN for a trust doesn’t change the trust structure. If the trust is a revocable trust upon receipt of the EIN, it will remain a revocable trust until the grantor dies. Although a tax ID is not required, a grantor may find it easier to separate the trust assets and activities from his own tax reporting. Others may find separation cumbersome and choose not to obtain the EIN before its necessary. A grantor is required to pay the tax on any trust income regardless of whether activities are reported on his own return or on the separate 1041 form until he dies.
Becoming an Irrevocable Trust
When a grantor dies, the trust automatically becomes irrevocable, which means changes and revocations can no longer be made. Because the grantor is not able to make decisions regarding the trust, and trust activity can no longer be reported on the grantor’s tax return, the IRS requires an irrevocable trust to have its own tax ID number. All irrevocable trusts throughout the United States must have an EIN number for tax reporting purposes. If the grantor obtains an EIN for the trust before he dies, you'll still need a new EIN for the trust once it becomes irrevocable. The IRS doesn't give a time limit for applying for the new EIN, but you should get one as soon as possible, as you'll need it to report trust activities to the IRS. The first tax return for the irrevocable trust is due on the 15th day of the 4th month following the close of the trust's tax year. The calendar year method is the default tax year for trusts, which ends on Dec. 31.
Obtaining a Trust Tax ID Number
The IRS makes it convenient for trusts to apply for an EIN and offers online, phone and mail-in applications. The online method is the quickest, and shows the EIN number for the trust immediately after the application is submitted. Visit the irs.gov website for the online application. Phone applications are accepted Monday through Friday at 800-829-4933, between 7 a.m. and 7 p.m. local time. If you wish to mail the application, use IRS Form SS-4 and send it to the address listed in the form instructions. After the grantor dies, only the appointed trustee or fiduciary can apply for the EIN.
With a background in taxation and financial consulting, Alia Nikolakopulos has over a decade of experience resolving tax and finance issues. She is an IRS Enrolled Agent and has been a writer for these topics since 2010. Nikolakopulos is pursuing Bachelor of Science in accounting at the Metropolitan State University of Denver.