A Father’s Day Look at Taxation and Trusts

Father's Day Brings Cards, ties and Drills.

Happy Father’s Day!  We have noted of late that summer holds many small but important holidays. Gavrilov and Co would be remiss if we did not recognize them.  Somehow Father’s Day and the concept of looking out after our families fit in with our serious topic of new laws regarding taxation on revocable and irrevocable trusts.

Our Father’s Day Tribute:  Fun Facts for Fathers and a Gavrilov Tax Squad Salute to their Special Day

We honor Father’s Day as a day of tribute, not only to our fathers, but to all the men who have influenced our lives with kindness, wise counsel, and generosity.  We preface our blog on taxes and trusts with wishes that you and your family enjoy a Happy Father’s Day this weekend, but also carry the spirit of Father’s Day throughout the entire week and beyond. However, let us first pay tribute to the celebration of Father’s Day with a few fascinating facts and observations.

Father's Day Dad and Son Play on Computer.
Father’s Day Cuteness:  Baby and Accountant Daddy, Working Together
Honors to Dad

We bring Father’s Day honors, not only to Dads, but to all those who are not exactly fathers, but who perform fatherly duties for us.  So, best wishes and a Happy Father’s Day to the step-fathers, brothers-in-law, uncles, brothers, friends, doctors and teachers who nourish and nurture our families!  Here at Gavrilov & Co, we thought you’d like to know a few of the characteristics and fun facts about this holiday.

1.  A Thoughtful Comment on Fatherhood:  In the famous words of Phillip Whitmore, “Any fool can be a Father, but it takes a real man to be a Daddy!”

2. A Huge Father’s Day Statistic:  Did you know Father’s Day is the fifth most popular card-sending holiday?  You know how we love financial statistics.  We must point out that Daddy’s Day will reap an estimated $100 million in greeting card sales. Now we are certain this does not include our children’s hand-made cards! We cannot assign a dollar value to these because, to a Dad, they are priceless.

3.  Surprising Calls, E-mails and Texts:  MSN reports, “If you thought Valentine’s Day or Mother’s Day was the most connected day of the year, you’re wrong.  Father’s Day is the busiest day of the year for collect phone calls.”

Father’s Day in Review
Father's Day is also a special Birthday, when a newborn arrives.
A Very Special Father’s Day to Remember–As a Dad greets his Newborn baby.

4.  A Little Father’s Day History:  The first celebrations among communities and states happened between 1908 and 1910.  But the nationalization of the holiday did not happen until much later.

In 1966, Lyndon B. Johnson created an executive order to declare the third Sunday in June as the official day for Dad’s Day.  But Father’s Day was still was not official or nation-wide.
We had to wait until 1972, during the Nixon administration, for Father’s Day to become an officially recognized National Holiday.

And Now—Trusts and the New Tax Laws

Forgive us if our backstory is a little bit like a lesson in Law 101.  At the level of creating trusts, the work of your accountant and your tax attorney blend and overlap.  The irony behind trust creations is some people do it just to avoid taxes, but the big revelation here is trusts still pay taxes.  Furthermore, the new tax laws have made some changes in the way they pay them.

Thus, in addition to your lawyer, you would not want to create a trust without consulting your tax accountant or financial adviser.  That being understood, let’s dive into this intriguing topic.

A Big Basic Difference between Irrevocable and Revocable Trusts

The IRS taxes Irrevocable and Revocable Trusts differently.  This makes perfect sense since they are completely different entities.

A revocable “trust is a trust whereby provisions can be altered or canceled dependent on the grantor.”
In contrast, an irrevocable trust is a trust that “cannot be modified, amended or terminated without the permission of the grantor’s named beneficiary or beneficiaries.”

Clarity About the Irrevocable Trust

Upon your death, the trust and its beneficiaries cannot be changed.  Even if you have left notes with relatives who are not beneficiaries, they cannot enact changes after your death.

Irrevocable and Revocable Trusts Merit  Different Taxation

  • On the one hand, the IRS sees the assets of a revocable trust as the explicit property of the grantor.  This explains why the IRS calls the revocable trust by the term “grantor trust.”
  • On the other hand, the government and the law treats an irrevocable trust as “an independent legal entity that owns its assets.”

Can you see why choosing the type of trust you create can have some serious taxation consequences?  Some might be good and some might be disagreeable.

The Heart of the Matter: Revocable Trusts and Your Income Tax

According to the income tax laws, “A revocable trust may earn income in the form of interest on funds held in a bank account.”  Likewise, if a trust owns a house, it can collect and bank rent on it.

  • The Gavrilov Tax Squad also wants you to know that when you create a revocable trust, all income from it—like house rental payments– will be taxed as part of your personal income.
  • Yes, you must report trust dollars on your form 1040. Without exception, the IRS must tax money left in the trust, even if you put it in a different account.  If the trust earned it, then the IRS must tax it.

A Special (Father’s Day) Tip from Your Tax Accountants at Gavrilov & Co:  Register the Trust

This might not be expressly a “Father’s Day” tip.  But at tax time, our analysts have to deal with a lot of fathers who do not understand registering the trust and answering the little block of  Trust identity information in the 1040 form.  Here is the scoop:

When you prepare your 1040, do not neglect the little section of ID information specifically concerning the trust on your 1040.  To do this properly, you must have registered the trust for an EIN number.  Experts in law and accounting state, “The trust must have an employer identification number so the Internal Revenue Service can identify it for tax purposes.  You can apply for an EIN on the IRS website or by filing Form SS-4.”

All About Your EIN Number Application

You won’t believe how easy this is.  Within the registration process, you simply submit certain information:

  • the name of the trust,
  • the name of the trustee.
  • Additionally, you include an address
  • and add a phone number.
  • Thus you register a representative of the trust.
  • And last but not least, you must “note the type of business activity that the trust conducts if any.”

So, in summary, as a practical example, if the trust owns Grandma’s 4 bedroom home, two rent houses, and a small bakery, as the grantor, you will pay the income tax on the home, the rent payments, and the bakery. 

Irrevocable Trusts and Your Special Income Tax Treatment

In the case of an irrevocable trust, the trustee is the person designated to complete and file Form 1041.  This requires attention to a number of details:

1. In the first place, Form 1041 requires the trust to report its identification information, as stated above in the case of the other type of grant.

2. Likewise, you must scrupulously record the “details of income, deductions and tax payments.”

Legal Tax Deductions from Your Revocable Trust: (Yes, even after New Tax Laws, A Few Deductions Remain)

Father's Day is a Good Time to Check on the Legacy You Will Leave Your Children.
A Trust is often a Legacy for Your Children and your Children’s Children.

As we mentioned, be sure you seek the advice of your financial planner or accountant before you open a trust.  However, for your legal information, we present an abbreviated list of trust tax deductions which might or might not be allowed for an irrevocable trust:

1. Deductions might include expenses for attorney’s fees, accountant’s fees, although not always.

2. Trustee compensation, and some interest, as well as state and local taxes could be deductible.

Note:  Some Miscellaneous Deductions Might Not Be Allowed

3. Beginning in 2019, and continuing to 2025, due to the Tax Cuts and Jobs Act, there are some miscellaneous itemized deductions no longer given to trusts. So, know your tax accountant, and thus make sure you have the most recent data concerning compliance with the tax law.) 

4. Here’s the Scary Part:  “The new law amends Sec. 67 by suspending all miscellaneous itemized deductions. Trusts and estates will not be permitted to deduct investment fees and expenses, and unreimbursed business expenses, among others.”

  • The trust might have deductions listed above applied because of certain investment losses or bad debts.
  • Likewise, the trust might be able to deduct the payment to beneficiaries.  Plus, deductions include expenses for the production or collection of income that exceeds 2 percent of the trust’s adjusted gross income.
  • Certain additional deductions might apply to special types of trusts.  Again, be sure to check with your accountant or financial adviser.

The Irrevocable Trust:  Creating the Details of the Trustee’s Income Tax Report

The trustee of an irrevocable trust is obligated to report the income from the trust income if it has earned more than $600.00 total, over the tax year.

(“You” in the comments below refers directly to the trustee.)

  • An important point to remember is that if you distribute income to trust beneficiaries, then the IRS requires more tax documentation.
  • Furthermore,  if you claim a charitable deduction, you must include additional tax documentation.
  • Additionally, “the trustee must also file Schedule K-1.  Then he or she must deliver copies of it to each beneficiary who received a distribution from the trust during the tax year.”

Gifts Require Taxation:  Be Careful About Giving Presents from the Trust

If you transfer assets to an irrevocable trust, or to the beneficiary of a revocable trust, your Gavrilov tax accountant wants you to be aware the gift “is a taxable event resulting in gift tax liability.”

That’s not a problem, but there is a form for you.

Father's Day Brings Us Closer To Family
Happy Father’s Day! May You Have a Blessed and Beautiful Celebration

You must file the gift tax return, Form 709, but only if you actually owe a gift tax.  At Gavrilov and Co, we have often had to remind people that “the recipient of a gift is never liable for gift tax.”

And now we thank you for visiting the Gavrilov & Co blog.

In closing, we cannot help but leave you with one more Happy Father’s Day thought.  We hope it can cover not only this weekend holiday but also in the coming week.

“The Righteous man walks in his integrity.  His children are blessed after him.”

Proverbs 20:7

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