Of late, myMastersTrust.com has been advising readers and new Trust owners to only apply with the IRS for an EIN Number the day before you need to open a bank account. I myself, as author of this article am Trustee on over two dozen Trusts. Of these many Trusts, I have bank accounts open for only three Trusts because more are not needed right now. First, if you already have an EIN Number, that's fine. There will be Tax return filing requirements at the end of this year for that Trust and EIN number combination, but we'll discuss that later this year, in November or December.
EIN Numbers For Trusts
All income has to be reported on a Federal Income Tax Return. It is common knowledge that everyone must provide a social security number to an employer, bank or brokerage institution so that income, dividends and capital gains can be reported to the individual and to the IRS.
In Trusts the income is not earned by a person, but instead is earned by an entity, such as a Trust or estate? With rare exceptions,Trusts and estates are required to obtain and report income under a separately assigned tax identification number known as an “Employer Identification Number” (EIN).
An EIN is a 9-digit number assigned by the IRS to certain entities for tax reporting purposes. For estate administration purposes, we’re usually talking about estates and non-grantor trusts. EIN’s are also used by corporations, partnerships and other business entities. Like a Social Security Number (SSN), an EIN is a unique nine-digit number, but instead of the 123-45-6789 format used for SSN’s, an EIN will always have a 12-3456789 format. When it comes to trusts and estates, the EIN is something as a misnomer since most trusts and estates are not actually employers in the typical sense of the word. Yet due to taxable stock dividends and extraordinary dividends that are not income to a Masters Trust they must be disclosed as a nontaxable event.
Not all trusts are required to acquire an EIN Number. A trust that can be deemed a “grantor trust” does not need a separate EIN. A grantor trust uses the social security number of the grantor. In simplest terms, a trust is a grantor trust when all of the income is required to be paid to the grantor or grantors (the person that creates the trust). There are other ways to create a grantor trust, but that is the typical situation. For example, in most cases when a person creates a revocable living trust for estate planning purposes, the trust will be a grantor trust during the grantor’s life. After the grantor’s death, however, the trust will no longer be a grantor trust and an EIN must then be obtained.
Up to five years ago, an EIN was obtained through a paper form called an SS-4 filed by mail or fax. You can still apply by mail or fax, but in most cases an EIN can be obtained in a matter of minutes through the IRS website. If properly submitted and accepted, the number is generated immediately and the notice can be downloaded as a PDF.
Income earned under the EIN assigned to a trust or estate is reported on a Fiduciary Income Tax Return — Form 1041. In many cases though the trust or estate acts as a pass-through entity under which the income is passed out to the beneficiaries.
The Settlor (sometimes called the grantor) of the Trust provides their Social Security Number to obtain the EIN. However this lets the IRS know that the Settlor has no liability with regard to taxes of the trust if any. It also lets the IRS know that the Settlor has no management or control of the Trust corpus and is not a beneficiary of the Trust.
Anyone who needs to apply with the IRS for an EIN Number and open a bank account, there are a couple things you should know:
- In a perfect world, your Settlor should apply for the Trust EIN Number directly with the IRS. This protects him or her as Settlor and you as Trustee at the highest level, therefore communicating to the IRS that the Settlor will not have any more dealings with this Trust. That is good!
- The IRS however understands that there are many kinds of Trusts, and many situations, actors, etc. Because of this, during the EIN Number application process, they ask if you are Grantor, Trustee or Beneficiary of said Trust. If your Settlor didn't apply for your Trust EIN Number, then it's OK. As much as we know, there should not be any negative consequences with the Masters Trust.
When you do need the EIN Number for your Trust, please follow these instructions on the myMastersTrust.com website
Over the last several days we have had several questions about whether a business bank account is right for the Masters Trust instrument. Here is an explanation from the Rosen & Rosen paralegal about what kind of bank account is necessary for your Irrevocable, Non-Grantor, Complex, Discretionary Masters Trust with Spendthrift provisions:
We would like all of our clients (and soon to be clients) to understand Trust Accounts at a bank. We provide this basic information which is important. Different banks have vastly different rules about Trust Accounts. However here is the basic understanding of this issue.
The Trust you have purchased from Master’s Trust Copyrights, LLC is a private, Non-Grantor, Irrevocable, Complex, Discretionary, Spendthrift Trust and needs to open a personal account to remain in the private sector of the bank
. The reason for this is simple. Almost all of the time, this type of Trust is not used as a business entity. Business entities require a business account for withholding and tax purposes and when used as a business trust the entity is a pass through. This means all the money that is paid or endowed to the corpus of the Trust must be passed along to either independent contractors, vendors, beneficiaries or the like before the end of the calendar year or what remains is taxed at the individual rate and paid by the trust. Basically eliminating the Discretionary nature of the Trust.
Business Accounts at banks are set up to accommodate payroll transfers, withhold taxes, unemployment, sales taxes and etc. However a personal account that a Trust holds may be used to pay for things, vendors and make disbursements to beneficiaries, vendors or independent agents, but the receiving parties are responsible for their own taxes, yet there is no provision concerning the account to perform business actions. Also privacy rules concerning business accounts fall under far different rules concerning seizures and forfeitures that do not apply to your Trust if kept in the private sector.
Therefore keep it simple and use a personal type account and the Spendthrift Provision of your Trust is immune to a court turnover order by any judge or court and your account may not be seized by the bank for debt of the bank.
We hope this helps in understand the rules of banks concerning trusts.
So there you have it! Again, we have lots of good information in our newsletter that will keep you on the straight and narrow. At Masters Copyrights, LLC we value your input, and want to encourage you to email us any questions to info@myMastersTrust.com. Stay in touch!