Tax News
Withholding When a Trust is on Title

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Need information on what to do when a trust is on title?  This article shares some important information to assist you in completing our real estate withholding forms as well as the following list of some important trust definitions.

Beneficiary – The person who is lawfully entitled to the proceeds of property, the title to which is vested in another, the person who is going to benefit.

Corpus or principal - The body of assets or property belonging to the trust, the property is funding the trust.

Fiduciary - Guardian, trustee, executor, administrator, receiver, conservator, or any person (individual or organization) responsible for the custody and/or administration of property of any person, estate, or trust.

Grantor - The creator of a trust, the individual whose assets are put into the trust.

Remaindermen - The person who receives what is remaining of the trust’s property at the end.

Trust - A legal entity created by a grantor under the laws of the state by a valid trust instrument for the benefit of a designated beneficiary.

Trustee – Any person (individual or organization) that holds or manages and invests assets for the benefit of another.

Now that we have an idea of our terms and their roles, let's find out why they are important. We created a flow chart to help you, FTB 7429, Do I need to Withhold on this Trust?

Grantor Trusts

In grantor trusts, the grantor retains certain powers over the trust administration. These powers include the power to revoke (amend or terminate) the trust. The grantor also keeps control over the property inside the trust.

For a grantor trust, the grantor is usually also a trustee and beneficiary of the trust’s income and principal. Items of income and deduction are generally declared on the grantor’s income tax return. The trust does not have a tax identification number (TIN) nor file a fiduciary income tax return.

A grantor trust is disregarded for tax purposes. The trust income and withholding payments must be included on the grantor's tax return as if the trust didn't exist. This is very important to understand when withholding and completing our withholding forms because we want the withholding credit to get to the proper person and to the proper account. For a grantor trust, we want the grantor to:

  • Certify Form 593-C, Real Estate Withholding Certificate.
  • Be listed as the seller on Form 593, Real Estate Withholding Tax Statement.
  • Report the income of the real estate sale.
  • Claim the related withholding credit.

Therefore, use the grantor's name and TIN on all withholding forms. Generally, the social security number of the grantor is used.

Non-grantor Trusts

In non-grantor trusts, the grantor has given up all rights, title, and interest in the principal. Only the trustee may revoke or terminate the trust. In a non-grantor trust, the grantor cannot be named as a trustee, beneficiary, or a remainderman.

A non-grantor trust is a separate entity from the grantor for all tax purposes and files a fiduciary income tax return. For a non-grantor trust, we want the non-grantor trust to:

  • Certify Form 593-C.
  • Be listed as the seller on Form 593.
  • Report the income of the real estate sale.
  • Claim the related withholding credit.

Therefore, use the trust name and federal employer identification number (FEIN) (this is the number used when filing its fiduciary income tax return) on all withholding forms. Generally, the FEIN of the trust is used.

Tips:

Grantor trusts become non-grantor trusts at the grantor’s death. A tax identification number for the trust should be obtained. On December 31 of the year of the grantor’s death, the administrator becomes responsible for filing a fiduciary income tax return for this non-grantor trust.

A non-grantor trust pays income tax at the trust level on any taxable income retained by the trust.

If a trust makes a distribution to a beneficiary, such distribution will pass the taxable income to the beneficiary, to be taxed on the beneficiary's personal income tax return. We require Form 592 to allocate the withholding credit from the trust to the beneficiary (see Next below). The trustee issues a Schedule K-1 to the beneficiary, reporting the type of income, amount, and the related withholding credit from the trust to be included on the beneficiary's individual income tax return.

Next…..Watch for our article in the next issue of Tax News explaining how a trust uses Form 592 to distribute withholding credits to a beneficiary.

Back to October 2014 Tax News

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