Does My Grantor Trust Need an EIN?
A review of the (often ignored) principles surrounding the tax identification of grantor trusts
This is the first in a series of articles on income tax reporting for grantor trusts. For the next article in this series, click here. To skip to the intro, click here.
Table of Contents
Intro
As an associate, I recall learning a system of documents to be prepared for each and every irrevocable trust I created. In addition to the trust, I often was charged with creating a package that including ancillary items such as Crummey letters and IRS Form SS-4. While the SS-4 has largely shifted to an online application form, it had as its purpose the application for an employer identification number (EIN) for the trust.
However, many trusts (both revocable and irrevocable) that are created are classified as grantor trusts. This means, for income tax purposes only, all or a portion of trust assets are treated as if they are owned by the grantor(s), or sometimes one or more beneficiaries, of the trust. In the case of an actual grantor of a trust (who either signs the trust in that capacity, or makes a gratuitous transfer to a trust), the retention of one or more powers described in IRC Sections 673-677 typically creates a grantor trust. If an actual grantor is not treated as a deemed income tax owner of all or a portion of a trust, a beneficiary may be treated as a deemed owner if a power described in IRC Section 678 is retained (or, alternatively, if such a power is released by a beneficiary while also retaining a power under IRC Sections 673-677).
(Given the confusion of shifting back and forth between grantor and beneficiary under these rules, we will refer to both as the “deemed owner” for situations where these Code Sections apply if the context permits.)
As a result, the income of the portion (or all) of the trust which is deemed to be owned by a grantor or beneficiary under these rules must be reported on the deemed owner’s individual Form 1040, as if the grantor still owned the trust assets. Which, begs the question - can the deemed owner’s taxpayer ID number (usually their SSN) instead be used as the trust’s taxpayer ID number, in lieu of an EIN?
IRC Sections 6109 and 671
The regulations under Code Sections 6109 and 671 create a comprehensive set of instructions as to when, and whether, a trust must obtain an EIN. Treas. Reg. 1.671-4 contains instructions as to the reporting of income by grantor trusts. The method of reporting selected by the trustee, or which the trustee is required to use, informs the EIN requirements set forth in Treas. Reg. 301.6109-1(a)(2) through (a)(4). Likewise, the termination of grantor trust status or the use of the IRC Section 645 election also informs such EIN requirements.
To make things easy, it is important to note first and foremost that the number of grantors or deemed owners counts. It is common, for example, to have a joint revocable trust, or a multiple-grantor ILIT holding a survivorship life insurance policy. So, to start, you need to determine the number of grantors or deemed owners.
But, that begs the question of who might be a grantor? Guidance on this point can be found in Treas. Reg. 1.672-2(e)(1). This Regulation generally provides that a grantor will include:
a person who creates a trust; and/or
a person who, directly or indirectly, makes a gratuitous transfer to a trust.
What is a gratuitous transfer, you ask? There are many more nuances to this inquiry, but generally this applies where a transfer to a trust is for less than fair market value in exchange. This is an independent inquiry from the question of whether there is a gift (by value) for gift tax purposes. Also of note is the fact that someone who merely creates a trust, but does not actually make a gratuitous transfer of property, cannot be a deemed owner under the grantor trust rules - this should be intuitive since one cannot retain a power over property or its income (under the grantor trust rules) without actually transferring that property.
But note, however, that indirect transfers are also included. So, for example, the lapse or release of a withdrawal right could be treated as a gratuitous transfer. Likewise, a grantor’s payment of an expense on behalf of a trust beneficiary (such as a direct payment of a premium on life insurance owned by the trust) could be a gratuitous transfer.
For a deemed owner under these rules, there are two methods for tax reporting set forth in Treas. Reg. 1.671-4. These rules only apply to the actual items of trust income, deduction, and credit for which the deemed owner is subject under the grantor trust rules.
Treas. Reg. 1.671-4
Contrary to popular belief, the Regulations don’t actually distinguish between a revocable trust and an irrevocable trust. In a second part to this series (where I cover reporting for grantor trusts on IRS Form 1041), I will discuss how the instructions for Form 1041 create a special carve-out for revocable trusts. But, for now, there are only two distinctions of note:
Is all of the trust (income and principal) treated as owned by one or more deemed owners?
If all of the trust income and principal is deemed to be owned, is there just one deemed owner, or are there two or more who share this deemed ownership?
Before diving into these distinctions, it is important to note that Treas. Reg. 1.671-4(a) sets forth the default treatment independent of such distinctions - that any item of income, deduction or credit that is deemed owned under the grantor trust rules shall not be reported on the trust’s Form 1041, but instead are to be shown on a separate statement to be attached to that Form. But, items of income, deduction or credit which are not deemed to be owned by a grantor or beneficiary under the grantor trust rules are reported in the usual manner on Form 1041.
It is possible for only a portion of the trust income, and not principal, to be deemed to be owned under the grantor trust rules. Treas. Reg. 1.671-3 contains a breakdown of this analysis, and it is often taken for granted that a trust may not be a wholly-grantor trust - see my discussion on ILITs, for example.
And, Treas. Reg. 301.6109-1(a)(2) sets forth the default rule - that unless there is one grantor or other person who is a deemed owner of all trust income and principal, the trust must obtain a taxpayer ID number. For all intents and purposes, this taxpayer ID number will be an EIN.
So, what happens if you have just one deemed owner? In such a case, these Regulations only allow you to avoid the need for a trust EIN if the method of reporting set forth in Treas. Reg. 1.671-4(b)(2)(i)(A) is elected. So, what does this mean? We can draw a couple of conclusions:
If a trust has multiple grantors who make, or are deemed to make (by contribution of joint or community property, or a gift-splitting election) gratuitous transfers, you must get an EIN (unless they are married filing jointly, as we will soon explore).
If a trust has one grantor, or one beneficiary, each of whom is treated as owning all of the trust income and principal under IRC Sections 671-678, you may be able to use that grantor’s SSN as the trust’s taxpayer ID number if the method of reporting set forth in Treas. Reg. 1.671-4(b)(2)(i)(A) is elected.
The Reporting Election
Taking this a step further, if you are at all familiar with tax reporting, you know that any payor of income often has an obligation to issue a Form 1099 to the payee. Such Form must report the name, taxpayer ID number (TIN), and often the address of the payee. So, in the case of a grantor trust, which number do we use? This is where we see the practical implication of a deemed owner’s SSN, versus a trust’s EIN, come into play.
For the time being, we can consider the default rule to be that the trust’s EIN must be provided to all payors of income, and that the payors will in turn issue a 1099 to the trust. From there, the usual rules splitting tax items between a deemed owner’s 1040, or a trust’s 1041, would kick in.
This choice may sometimes be made by the trustee, for certain types of grantor trusts. Where this choice is made, the trustee can either elect to report a trust’s EIN to payors, or to instead report the grantor’s SSN to payors (assuming our one deemed-owner requirement is met) along with that grantor’s name and the trust’s address.
But, there are trade-offs. For one, if the trust EIN is used, then the trustee must also file Forms 1099 by class of income (for example, 1099-B, 1099-DIV, 1099-INT, etc.), reporting the grantor or deemed owner as sole “payee” of such items of income. Each 1099 must be filed with the IRS and a copy must be given to the grantor or deemed owner. This can add some complexity.
Also, unless the trustee in question is also the grantor or deemed owner, then the trustee must provide (1) a statement of all items of income, deduction and credit to the sole grantor or deemed owner. But, this simple statement is not enough. The statement has a blanket requirement of providing (2) the grantor or deemed owner with the information necessary to accurately report these tax items on their personal income tax return. The statement must also (3) expressly inform the grantor or deemed owner that these items must be included in computing their taxable income and credits on their personal income tax return.
(As an aside, I would venture to guess that few if any trustees fulfill this tax compliance requirement. In the next article in this series, we will explore whether this statement is the same as what must be provided with Form 1041, along with the question of whether this statement (like a 1099) is provided to the IRS.)
Two or More Grantors
In a situation where there are two or more grantors or deemed owners who are deemed to own all trust income and principal under the grantor trust rules, the trust (as noted above) must get an EIN. The only exception is found in Treas. Reg. 1.671-1(b)(8), which allows spouses filing jointly to be treated as one grantor or deemed owner by the trustee. So, in a joint revocable trust, you can only avoid the EIN requirement so long as spouses file jointly - if they file separately or are not married, the trust may need an EIN. In the case of filing jointly, one spouse’s SSN must be selected if the trustee will use that method of reporting as outlined above.
In the situation of multiple grantors or deemed owners, the trustee’s duties become more complex. The trustee must provide the trust EIN to all payors of income to the trust, and in turn must provide a 1099 to each grantor or deemed owner as to their respective shares of each class of income. In addition to the 1099, the trustee must furnish the statement outlined above to each grantor or deemed owner as to their respective portion of the trust’s items of income, deductions and credits. And, unlike the situation with one grantor or deemed owner, a trustee who is also one of multiple grantors or deemed owners is not relieved under the Regulations of the duty to provide this statement to themselves.
Summary and Conclusion
I will have more to come on 1041 reporting, but for now remember that the only situations under which the Treasury Regulations allow a grantor trust to use an SSN in lieu of getting a trust EIN are where:
All of the trust’s items of income, deductions, and credits are treated under the grantor trust rules as being owned by one grantor or deemed owner (including joint filers); and
The trustee elects to follow the reporting procedure under Treas. Reg. 1.671-4(b) of providing the grantor’s or deemed owner’s name, address, and SSN to all payors of income to the trust, coupled with a statement provided by the trustee to the grantor or deemed owner (unless that person is also the trustee) describing these items and informing them of the obligation to report such items.
And, where the trustee will use a grantor’s or deemed owner’s SSN, the trustee must get a W-9 reporting this SSN to keep on file and to provide to payors issuing Forms 1099 to the trust, along with the statements to be provided to the grantor or deemed owner whose SSN was so reported. In this series, we will also dive deeper into the trustee’s obligation to maintain these records.
For now, note that if this abbreviated reporting procedure is followed, it can and will end at some point because grantor trust status does not last forever. At some point, a trust EIN will be required for some or all trust income, or at best a switch to a new grantor’s or deemed owner’s SSN must be made. As we will see, this will get even more complicated where a 645 election is involved.
Click here for the next article in the series.