Dear Ms. Allison: How large can a Trust become before it is taxable by the federal government and is there such a thing as a Sub-Trust or Smaller Trust outside the original? Thanks, PT in NE Oklahoma
Your question is difficult to answer due to the many different taxes that could attach and the myriad of different Trusts that exist. Here are a few answers, but by no means are they the only answers.
Revocable Trusts are those which can be changed by the grantor (person who set them up) and are subject to income taxes. The income taxes are usually reported on the grantor’s 1040 (regular Income Tax Return) during his/her life.
Irrevocable Trusts are those that generally cannot be changed and are often part of an estate plan. These are subject to paying income taxes and require filing a 1041 (Estate Fiduciary Income Tax Return).
For the wealthy, there are death taxes – those are due on any estate that exceeds $11,400,000.
There are generation-skipping taxes if grandchildren are inheriting. Generally, the inheritance must exceed $11,400,000 to attach these taxes, which are reported on IRS Form 709, the U.S. Gift and Generation-Skipping Transfer Tax Return if given during life or on a death tax return if at death. In addition, the taxes can be reported as distributions are made to beneficiaries.
It is possible that none of this answered your questions. I think this is a much more complex area than you know. For answers applicable to your specific situation, you need to meet with an estate tax lawyer.
That’s your question, Asked and Answered,