Grantor Trust Income Tax Return

[robmotty]

I have a client whose attorney set up a blind trust to claim a large gambling prize which was reported on Schedule W2-G.  The W2-G also had a large amount of withholding.   I am treating the trust as a grantor type trust for income tax reporting purposes.  The 1041 and IRS regs state to report on the grantor information letter attached to the return:

 

"Any deductions or credits that apply to this income. Report these deductions and credits in the same detail as they would be reported on the grantor's return had they been received directly by the grantor"

 

My two questions are 1) Am I correct to treat this trust as a grantor trust?  2) Is it ok to show the tax withholding as a credit on the information letter? 

 

I appreciate any help and guidance.

[jasdlm]

I've never done a return for a blind trust, but here is my take:

 

I do not think the trust is a grantor trust because if I understand correctly the way blind trusts work, your client (the beneficiary) does not control the trust.  The lawyer is likely the trustee.  I think I would file a 1041 with a k1 to the beneficiary.

 

Unfortunately, I do not believe you can transfer withholding to a beneficiary via k1.  

 

Line 24e—Federal Income Tax Withheld

 

Use line 24e to claim a credit for any federal income tax withheld (and not repaid) by: (a) an employer on wages and salaries of a decedent received by the decedent's estate; (b ) a payer of certain gambling winnings (for example, state lottery winnings); or © a payer of distributions from pensions, annuities, retirement or profit-sharing plans, IRAs, insurance contracts, etc., received by a decedent's estate or trust. Attach a copy of Form W-2, Form W-2G, or Form 1099-R to the front of the return.

 

Except for backup withholding (as explained below), withheld income tax cannot be passed through to beneficiaries on either Schedule K-1 or Form 1041-T.

 

The client I have who has a trust (not blind) for her lottery winnings has to pay the taxes on her individual return each year reflecting all of the pass-through income, but she has to wait for the refund to process from the 1041.

 

That's my best inexperienced advice.  Hopefully we'll hear from someone who has more experience.

[robmotty]

Thanks for the reply.  It seems I left out some important facts.  My clients/grantor are also the co-trustees of the trust.  The sole purpose of the blind trust was to protect identity.  My client has complete control of the trust as they cashed their check and immediately closed the bank account.

 

Since the trust is a grantor type, it does not appear I even have the ability to ask for a refund as the instructions say to keep the first page blank.

[Terry D EA]

I  would only give one very important tip here. Get the trust instrument and read it completely. Most trust documents tell you how to handle the taxation. Consult the attorney that created the trust if you have to. Are you talking about keeping the first page of the 1041 blank?

[jshtax]

Aren't 1041s ignored for grantor type trust and all information reported on the individuals return?

[jshtax]

Grantor Type Trusts

 

A trust is a grantor trust if the grantor retains certain powers or ownership benefits. This can also apply to only a portion of a trust. SeeGrantor Type Trust, later, for details on what makes a trust a grantor trust.

In general, a grantor trust is ignored for income tax purposes and all of the income, deductions, etc., are treated as belonging directly to the grantor. This also applies to any portion of a trust that is treated as a grantor trust.

Note.

If only a portion of the trust is a grantor type trust, indicate both grantor trust and the other type of trust, for example, simple or complex trust, as the type of entities checked in Section A on page 1 of Form 1041.

[Abby Normal]

Aren't 1041s ignored for grantor type trust and all information reported on the individuals return?

1041s aren't needed for revocable trusts. People use revocable trusts to bypass probate. I have several clients with their houses and investments in revocable trusts.

[jasdlm]

I didn't realize it was a revocable trust under grantor control.  If that is the case, I agree with JMdavis.

[Burke]

Perhaps the term "blind trust" is a misnomer.  A blind trust is a trust set up in which the grantor has no control whatsoever.  Politicians do this when they are elected to office so that they are not held accountable for the assets owned, the transactions, the buys & sells which occur, in order to avoid a conflict of interest. A disinterested trustee controls it completely.  It appears from the above that this was set up to receive monies from a lottery or gambling winnings just to protect the identity of the recipient and that it is now terminated.