Why Does an Estate or Trust Need Its Own Tax ID Number?
One of the more complicated ideas that non-legal persons struggle with in the estate and probate administration process is the need for separate tax identification numbers. As you probably know, when you file your individual federal income tax return (Form 1040) each year, you need to include your Social Security number. This also functions as your tax ID number with the Internal Revenue Service.
But when a person dies, their Social Security number effectively dies with them. Any assets that person held individually at the time of death becomes part of their probate estate. And it is necessary to obtain a separate tax identification number from the IRS for that probate estate. Just as a corporation is a separate legal entity from its individual shareholder, an estate is a legally separate entity from the deceased individual.
Estates Need to File Their Own Tax Returns
Obtaining a tax ID number for an estate is important for two reasons. First, it allows the personal representative or administrator to open a separate bank account for the estate, which can then be used to collect the estate’s assets and pay any debts or expenses. Second, an estate tax ID is needed to file the estate’s tax return.
Now, you may be surprised that estates need to file tax returns. But under federal law, if an estate generates more than $600 in income, the personal representative must file a separate tax return known as a Form 1041. This is separate from the deceased individual’s final Form 1040, which also must be filed (under the person’s Social Security number) to report any income or tax owed prior to the date of death.
As for the Form 1041, there are many scenarios where an estate generates taxable income. It often takes several months–and in some cases, years–to complete the administration of an estate. During this time, interest may accrue on the estate’s bank accounts. Or if the estate is managing a house, there may be rental income from the tenants. And if any stocks or other securities held by the estate are sold prior to final distribution, any capital gains are also considered taxable income.
Does an Estate Tax ID Include Any Trusts?
So it is clear that a probate estate always needs to have its own tax identification number. But what about a trust? Many people execute wills that require the creation of a trust after their death. For example, a person may create a trust to manage their child’s inheritance until he or she reaches the age of 18. Does the estate’s tax ID also cover this trust?
Generally speaking, the answer is “no.” The trust is not considered a “continuation” of the estate by the IRS. The trust is its own legal entity and will require its own tax identification number going forward. The same is true if a person created a revocable living trust prior to death. At the date of death, such trusts become irrevocable and exist separately from any probate estate.
This is only a brief overview of how tax identification numbers work with estates and trusts. If you have additional questions about this or any other estate planning topic, contact the Fort Myers estate and probate administration lawyers at the Kuhn Law Firm, P.A., at 239-333-4529 today to schedule a free consultation with a member of our legal team.