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Grantor Trust Income Tax Reporting Obligations

The law regarding a trustee’s obligation to file tax returns for grantor trusts can be confusing but a simple result is often obtained. To avoid the necessity of filing a Form 1041 or the necessity of filing numerous Forms 1099, it is suggested that most trustees of fully grantor trusts utilize alternative one for tax compliance set forth by the IRS in the Treasury Regulations under the IRC Sec. 671 Regulations. Further, the practitioner is encouraged to implement two additional steps to ensure full compliance. The first additional step requires the attorney to clearly state in the trust document that all parties acknowledge grantor trust status. Further, the prudent professional should consider a standard form to be provided to all payors to the trust as needed.