A very common question I hear when people sign their trust is, “Do I need to get a tax ID for my trust?” In most cases the answer is no. Let me explain why.
In estate planning, the most common kind of trust is the revocable grantor trust (there are a few other names for it, but let’s go with this one to keep things simple). To translate this into regular English, in the most typical estate planning trust, the person (or couple) creates a trust for their benefit and funds the trust with their own assets (and since they are “granting” their assets to the trust, they are called the “grantor”). This trust can be amended or revoked by the grantor(s) at any time, making it a revocable trust. Hence the name “revocable grantor trust.”
Since the trust can be revoked at any time, the IRS treats the assets that are in trust as if the grantor(s) still owned them in their own name. This means that the grantor(s) have no change whatsoever to their taxes owed. This also means that they do not need a new tax ID for the trust; since assets in trust are treated as if the grantor(s) still own it in their own name, their social security number works as a tax ID.
This is not true of an irrevocable trust (a trust that cannot be revoked). An irrevocable trust is treated as its own entity in the eyes of the law, similar to a corporation. Since an irrevocable trust is its own entity, it needs its own tax ID, and assets in the irrevocable trust will be taxed at the tax rate for trusts.
So when do we deal with irrevocable trusts in estate planning? Most commonly, when the grantor(s) die. Since the grantor(s) are the only ones with the power to amend or revoke their trust, on their death, their trust changes from a revocable trust to an irrevocable trust. Irrevocable trusts also come into play when creating trusts for tax avoidance/reduction purposes (e.g., the QTIP or Bypass Trust) or when creating a Special Needs Trust. In order for these trusts to serve their respective purposes, they have to be irrevocable.
So to summarize, the typical estate planning client only needs to get a new tax ID for their trust when a grantor dies, when they are creating trusts to reduce their taxes, or when creating special trusts like the Special Needs Trust. A typical client just starting their estate plan usually doesn’t need to worry about it.
If you have questions about this article, or you are wondering if your trust needs its own tax ID, please feel free to reach out to me at kaway@kawaylaw.com.
