Trusts and Tax Liabilities: Do I Need to File a Tax Return for a Trust/Estate?

Handling the financial responsibilities of a trust or estate can feel overwhelming, especially when it comes to taxes. If you’ve recently been appointed as a trustee or executor, here’s what you need to know about trusts or estates and their tax returns, including how to stay compliant.

What Are Trusts and Estates?

A trust is a legal entity that’s created to manage assets. It’s designed to benefit the people who will be inheriting a property, known as “beneficiaries.” You can have a living trust, one that’s set up during your lifetime, or a testamentary trust that’s through a will after your passing.

An estate, on the other hand, refers to the total assets (and liabilities) left behind when you pass away. An estate can include:

• Investments
• Bank accounts
• Property
• Debts

If you’re named as the estate administrator or executor, you’re responsible for not only managing these assets but also distributing them according to a will (or state law if no will exists).

While they serve different purposes, both a trust and an estate can generate income–and where there’s income, there’s the IRS.

Form 1041

What’s IRS Form 1041?

Form 1041 is the U.S. Income Tax Return for Estates and Trusts. Think of it like the equivalent of an individual’s tax return, but specifically for non-living entities.

When Are You Required to File Form 1041?

Wondering:

• Do I need to file a tax return for a trust?
• Do I need to file a tax return for an estate?

The answer is: It depends. If any of the following apply to your situation, it’s likely that you’ll need to file a tax return:

✓ The trust or estate earns $600 or more in gross income during the tax year

✓ Any beneficiary is a non-resident alien

✓ If a trust has taxable income or distributes income to beneficiaries

An important note: A trust or estate will have its own taxpayer identification number (TIN). If a loved one passes away, any income earned after their passing must be reported under the trust or estate’s TIN–not your loved one’s Social Security number.

Common Deductions

So while the answer to “Do I need to file an estate tax return?” is most likely “yes,” the good news is that trusts and estates may be eligible for several deductions that help reduce their tax liability. Common deductions include:

• Legal and accounting fees
• Charitable contributions made from the trust or estate
• Executor or trustee fees
• Distributions to beneficiaries (which may shift the tax burden to recipients)
• Administrative expenses, such as property expenses

Because deductions are nuanced and may come with other tax implications, it’s important to work with a tax professional experienced in trusts and estates.

Simplify the Process With Monocacy

Need help with Form 1041 or trust tax planning? Our Monocacy team members are here to help. We offer a full suite of financial services, including assisting with your trust or estate tax needs, so you can focus on fulfilling your responsibilities with confidence–not confusion.

Book a discovery call to learn more about our services and how we can help you navigate the process with clarity and expert support every step of the way.