Should a Living Trust Receive a 1099?

By Kay Lee

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.

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.

1099 Basics

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.

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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.

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Can I Pay Medical Expenses From an Irrevocable Trust?

A trust is a method of placing assets under the control of a trustee, for the purpose of passing these assets to beneficiaries. An irrevocable trust can't be changed or revoked by the grantor of the trust. With this arrangement, the assets pass to heirs outside of a probate court and escape federal estate tax. One legal purpose of a trust would be to pay medical expenses on behalf of a beneficiary.

Joint Trust Vs. Single Trust

Although a single trust and a joint trust are designed for the same basic purpose of leaving property to specific individuals upon the death of the person or persons who created the trust, there are some differences. The primary distinction between a single trust and a joint trust is the number of people who create the trust and manage the trust property. A joint trust, however, can provide tax relief not offered by a single trust for estates worth a considerable amount of money.

A Living Trust Explained

A living trust is a legal device that establishes how your property is to be transferred upon death, but goes into effect during your lifetime. The grantor, who puts his property into the trust, assigns a trustee to administer the trust on behalf of a beneficiary. There are several types of living trusts. In comparison, a testamentary trust is created by the terms of a will and does not go into effect until death. Living trusts avoid probate but testamentary trusts do not.

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