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 to the grantor’s 1040 (regular Income Tax Return).
Irrevocable trusts are those that usually are not able to be changed and the grantor is often acting on a court order or the trust is set up as part of an estate plan to occur after someone’s death. These are subject to filing and paying income taxes on a 1041 (Estate Fiduciary Income Tax Return).
For the wealthy, there are estate taxes – those are due on any estate that exceeds $11,400,000. In addition, if an irrevocable trust is created as part of the estate plan, its assets could be subject to the death tax.
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 an irrevocable trust is created during the grantor’s life, a 709 form also is to be filed. Depending on the value of the Trust, a gift tax may be due; only in this situation it is paid by the grantor.
It is possible that none of this answered your questions. I think this all is a 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. My best to you,