Living trusts are a popular tool in estate planning as individuals are able to retain ownership rights over assets during their lifetime, but facilitate the transfer of those assets upon their death. Consistent with the administrative ease of living trusts, there are no regular tax statements; however, the underlying assets in the trust may trigger certain reporting requirements.
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Living Trust Basics
A living trust is an estate planning tool that allows an individual to transfer assets outside of the probate system during his lifetime. The individual creating the trust is called the trustee. There is little formality to establishing a living trust other than a written agreement or declaration of the trustee of the intention to create a trust. By avoiding probate, costs are lower to administer the trust and the transfer is quicker since it is administered privately rather than through the judicial system. Moreover, the trustee retains control over his assets during his lifetime.
IRS Form 1099 reports the details of certain business transactions that may have tax consequences for either the payer or the payee, such as interest or retirement distributions. These forms are typically sent by the individual or organization that made the payment and the recipient of these forms is the individual who received the payment. Form 1099 also includes information regarding the amount involved in the transaction, taxpayer identification numbers, date of the transaction and type of business transaction being reported.
Tax Forms for Living Trusts
Living trusts are treated the same as grantor trusts, which means they are ignored for tax purposes during most tax years. Accordingly, a living trust will not receive a Form 1099 for trust activities. Instead, the underlying assets in the trust typically dictate whether a Form 1099 is sent. For example, if an interest-bearing account pays interest that exceeds the threshold amount for sending a Form 1099, the holder of the interest-bearing account (i.e. a bank) would send the trustee a Form 1099.
Tax Implications of Living Trusts
Although living trusts are ignored for tax purposes until the death of the trustee, living trusts may have tax implications at the trustee’s death depending on the size of the estate. In order to be taxable, an estate must exceed a certain size -- as of 2012, this is $5.12 million.
References & Resources
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