Income Tax Returns for Trusts and Accounting to Trust Beneficiaries

Income Tax Returns for Trusts

After its creation, a trust is a separate legal entity, like a corporation, and is thus subject to taxation by both the federal and state governments. The trust will be taxed using the same rules for personal income, but with slight variations. The trustee needs to file the trust tax returns promptly to avoid penalties and causing harm to the trust. An accountant or tax attorney can help the trustee select and file the appropriate tax returns.

First, trustees must account upon the transfer of a trust from one trustee to another. This requirement exists so that none of the trust property will be lost or stolen during the transfer of the trust responsibilities to the new trustee. . . .

Second, an accounting is required upon the termination of a trust. This is to ensure that the trust property has been disposed of properly and to provide notice to any interested parties that the trust will terminate in the near future.

Third, there can be periodic accountings to all beneficiaries. The period can be annually or bi-annually, or some other time period. The trust can be written so that no periodic accounting needs to be made, and often the trust waives accounting if the trust assets are small and the trustee is a family member.

Accounting to Trust Beneficiaries

In California, the trustee has a statutory duty to account.

This duty requires the trustee to provide to all trust beneficiaries a copy of the trust inventory and account for all income and expenses of the trust. The duty to account can be altered by the trust document. There are several situations which may require an accounting.

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