BY CHRISTOPHER YUGO | Sunday, October 19, 2008

Q: How will creating a trust affect my tax returns? Do I have to
prepare a tax return for the trust?

A: As a general rule, creating a revocable living trust naming
yourself as trustee will not affect your tax reporting.

Mot revocable living trusts do not require a taxpayer identification
number (TIN). You will continue to use your social security number on
your accounts and income will continue to be reported on your personal
income tax returns.

It's your money after all, and as long as you are reporting the income
and paying any resulting tax, Uncle Sam should be cool.

In my job, I see a lot of trusts that name First National Bank as
trustee rather than the person creating the trust. In these cases, we
apply for a TIN for the trust and file a fiduciary tax return. The tax
return is really just an informational return, but we do in fact file
the return.

Since it is important for a professional trustee to keep track of
income and principal, a separate tax return makes the administration
easier. Some accountants have told me that a separate TIN and an
informational return isn't required for our revocable living trusts.
However, from an administrative standpoint, I like having the
separation. Formality for formality's sake.

After your death, when the trust becomes irrevocable and settlement
begins, a separate TIN is required as is a fiduciary tax return. After
your death, income should no longer be reported under your social
security number. At that point the trust has it's own tax reporting
requirements.

Immediately after the death of the settler, I request a TIN for the
trust and start reporting the income to the trust rather than the
individual. Even in situations where I already have a TIN for a
revocable living trust, I request a new TIN for the death transfer
trust. Remember, after your death, the trust becomes an irrevocable
trust. In other words, the John Doe Revocable Living Trust becomes the
John Doe Irrevocable Trust after your death. The new trust requires
it's own TIN and fiduciary tax returns.

Having said all that, don't let the tax reporting dissuade you from
creating a trust. Most people won't notice a difference.

Also keep in mind that we are talking about revocable living trusts
with the settler as the trustee. If you create an irrevocable trust,
such as Irrevocable Life Insurance Trust, a separate TIN and tax
return are likely to be required.

I suppose the rule of thumb is if your created the trust, have total
control over the assets and receive all of the benefits and income, it
probably doesn't require its own TIN and it can be reported on your
tax returns. If in doubt, ask your attorney or accountant

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