Land Trust Taxes

A land trust is a legal arrangement between a grantor, who creates the trust, and a trustee, who manages the trust for those who will benefit from the trust, called the trust beneficiary(s).

Most land trusts are set up as revocable living trusts and are designed to hold real estate and real estate-related assets, such as developed and undeveloped land, mortgages, notes, and other assets related to ownership rights in real estate.

A land trust provides the grantor (who also funds the trust with his or her real estate) several benefits:

• Since the trust is revocable, real estate you can be added or removed from the trust whenever you want while you are alive and able. In addition, the trust can be amended, restated, or revoked at any time.
• As the grantor and beneficiary of your land trust, you retain control of the real estate in the trust through the power of direction over the trustee who manages the trust real estate. You can even act as the trustee yourself.
• When you create a land trust, you can designate a successor trustee who will step in and manage the trust property when you or the trustee you originally chose becomes incapacitated or otherwise unable to manage the trust.
• Any assets held in the trust when you pass away will avoid probate and can be transferred to the trust beneficiaries directly.

That said, the main benefit that a land trust provides to its grantor is privacy and anonymity. Firstly, a trust is a private arrangement and not a matter of public record. This means that the manner in which the trust assets are transferred to its beneficiaries is not open to public scrutiny.

Secondly, because a land trust does not have to be recorded with any state or federal agency, the ownership of the trust property can remain anonymous. This anonymity provides a barrier between you, the beneficiary of the trust property, and your creditors, who will find it extremely difficult to identify you as being the owner of said property.

The way a Land Trust is taxed will generally depend on whether it is a revocable or irrevocable. A Revocable Trust is one that can be amended or changed during the life of the Grantor/Creator. An Irrevocable Trust is one that, once created, cannot usually be amended or revoked.

Revocable Land Trusts do not pay taxes because the IRS regards them as disregarded entities. A Revocable Land Trust doesn't even need to have a tax number (though they do sometimes have one anyway) because it is not required to file an income tax return.

Furthermore, when assets are moved in and out of a Revocable Land Trust, no tax consequences are triggered. What's more, when the Trust earns income, this income is reported on the Grantor's individual tax return.

For instance, if your Revocable Land Trust owns stock and that stock receives a dividend, you will need to report this income on your individual income tax return. However, there will be no tax consequences for the Revocable Land Trust itself.

The vast majority of Land Trusts are revocable. However, all Revocable Land Trusts become irrevocable upon the death of the Grantor.

This is because, once the Grantor dies, the Trust can no longer be amended. At that point, the Trust becomes irrevocable by definition and the income tax consequences of an Irrevocable Land Trust come into play.

If a Land Trust is Revocable, it doesn't have to file a tax return. However, if the Grantor dies, it will become Irrevocable and, thereafter, have to file a tax return.

Similarly, if the Trust is set up as an Irrevocable Land Trust from the start, you need to be aware that it has to file a tax return and that there might be income tax consequences.

Sometimes, however, an Irrevocable Land Trust has no income to report. Furthermore, when the Irrevocable Land Trust does have income to report, the Trustee may choose to distribute that income to the Trust Beneficiaries.

In this case, the Trust Beneficiaries will report the distributed income on their individual income tax returns, where it will be taxed at the personal income tax rate. And the Trust will, again, have no income to report.

To summarize, a Revocable Land Trust pays no taxes. Income earned by a Revocable Trust flows through to the beneficiary where it is reported on their IRS Form 1041. On the other hand, an Irrevocable Trust must generally pay taxes on any income it earns, unless that income is distributed to the Trust Beneficiaries.

The filing requirement for an Irrevocable Land Trust are as follows:

1. Obtain a tax ID number for the Trust. An Irrevocable Trust must have a tax ID number, just like a corporation does when it is formed.
2. Prepare Schedule K-1 for income that was distributed to the Trust Beneficiary. Copies of the completed Schedule K-1 must then be sent to each Beneficiary.
3. Prepare Form 1041, U.S. Income Tax Return for Estates and Trusts if the Trust has either:
   
   1. Taxable income; or if there is no taxable income
   2. Gross income of $600 or more.
4. File IRS Form 1041 with IRS, along with a copy of Schedule K-1. The due date is the 15th of the fourth month following the year-end.

Reporting income tax for an Irrevocable Land Trust requires one to calculate its gross income, gains and losses, and eligible deductions for the year, which can all be rather complicated.

As a result, you may need the assistance of a qualified accountant or estate planning professional to help you calculate and report the Trust income properly.

To learn more about Land Trust taxation and/or for help filing a tax return for your Wyoming Land Trust, call us to schedule a free consultation with an experienced Wyoming estate planning attorney.

The way a revocable trust is taxed is a simple matter because a revocable trust pays no income tax. However, a revocable trust can become irrevocable. For example, when the grantor of a revocable trust passes away, the trust can no longer be amended, restated, or revoked and, therefore, becomes irrevocable.

Furthermore, whenever you set up a trust as irrevocable from the start, you need to be aware that there may also be income taxes to worry about. This is because irrevocable trusts are not considered disregarded entities by the IRS. That means that an irrevocable trust must pay income taxes, and these income taxes can be quite substantial.

Irrevocable trusts require their own tax ID number, just like a corporation does when it is established. Furthermore, the trustees of an irrevocable trust must report the trust’ income on a separate income tax return (IRS Form 1041).

In addition, the way income is reported for an irrevocable trust can be very complex and you will most likely need the help of a qualified accountant. Having said that, an irrevocable trust often has no taxable income to report.

What's more, even if an irrevocable trust has income to report, since trust tax rates are quite high, the trustee will often distribute such income to the trust beneficiaries. This way, the trust itself will pay no income tax, but the recipient of that income will report it on his or her personal income tax return, where it will be taxed at their own personal income tax rate.

To summarize, revocable trusts do not pay income taxes, therefore how a revocable land trust is taxed is a non-issue. Irrevocable trusts, however, may have to pay income taxes, and given the complexity of how irrevocable trusts are taxed, you may want to hire a good accountant to help you sort out the income tax issues for your irrevocable land trust.

To learn about the taxation of land trusts in general, or for more specific information about how land trusts are taxed in Wyoming, please contact us to schedule a free consultation with an experienced Wyoming estate planning attorney.

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