Land Trust Taxes
A Land Trust is a special kind of Living Trust used to hold real estate and real estate-related assets. Land Trusts are primarily used for privacy and asset protection, but can also be used for probate avoidance and other estate planning purposes.
Land Trusts are usually Revocable Living Trusts, meaning that they are effective during your lifetime and can be amended or revoked whenever you want, as long as you have the capacity to do so.
The terms of a Land Trust can be tailored to your particular needs and the type of real estate you want it to hold. Read further to find out if you need a Land Trust in your estate plan.
The Benefits of a Land Trust
Using a Land Trust to hold your property can provide you with a number of benefits:
- Separation between your real estate investments and the other assets you own;
- Anonymity. Only the Trustee's name and the name of the Trust are listed publicly;
- Probate avoidance; assets held in a Living Trust bypass probate;
- Protection from liability, specifically lawsuits, liens, and judgments against the property;
- The ability to buy and sell the property without the transactions being open to public scrutiny.
Does a Land Trust Have to Pay Taxes?
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.
How Revocable Land Trusts Are Taxed
Revocable Land Trusts do not pay taxes because the IRS regards them as disregarded entities. A Revocable Land Trust doesn't even have a tax number 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.
Tax Implications Once the Grantor of a Revocable Land Trust Passes Away
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.
Do Land Trusts Have to File a Tax return?
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.
How to File a Tax Return for a Land Trust
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:
- 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.
- 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.
Prepare Form 1041, U.S. Income Tax Return for Estates and Trusts
if the Trust has either:
- Taxable income; or if there is no taxable income
- Gross income of $600 or more.
- 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.