Many of our clients ask whether it is necessary for tax purposes to obtain an employee identification number (“EIN”) from the Internal Revenue Service (“IRS”) for their trust. The answer is always yes, but as discussed below, the EIN may be your social security number.
The type of EIN you need depends on the type of trust you formed. The EIN may be your social security number or a separate tax identification number issued by the IRS at the time of forming your trust. You cannot avoid taxes, but you can plan for and structure your taxes to minimize their impact to your personal fortunes.
There are for purposes of this article, two types of trusts - grantor and non-grantor. The difference between these two types of trusts is discussed on a separate WEB page. The Internal Revenue Code (“IRC”) has different sections applying to trusts based on this distinction. A WAPT has to be irrevocable; so, the question is what powers and rights you retained and the impact of those rights on the taxability of the trust. In short, the more powers you retain, the more likely it is that your trust will be taxed as a grantor trust. This is not a value judgment. The trust you established fits your needs, which go beyond taxes. Please keep this in mind.
If you formed a grantor trust, the tax aspects flow directly through to your Form 1040 schedules. If you elected a non-grantor trust, the tax aspects will have to be reported on a Form 1041 filed by the trust. Any undistributed income is taxed to the trust. Distributed income is taxed to the beneficiary and is reported using a Form K-1, which is sent to beneficiaries who receive distributions throughout the year. Please keep in mind that there is no “double taxation” to a trust like there is to a C-Corporation. This is a critical distinction to remember.
An EIN is issued by the IRS for the purpose of identifying your trust for tax purposes, just like any other legal entity such as a partnership, LLC or corporation. You need an EIN in order to put assets into your trust; particularly bank and financial accounts. Your trust EIN will always be either 1) your social security number if you have a grantor trust, or 2) a separate number issued by the IRS.
Applying for and obtaining a separate EIN for a non-grantor trust is a process which involves using your information to answer a series of questions for the IRS, which is done by our firm for you online. Once the questions are answered, the IRS will issue an EIN which will serve as the trust identification number.
Summing this up, the trust EIN is either:
- Your social security number if it is a grantor trust; or
- A separately obtained EIN if it is a non-grantor trust.
Good luck out there.