Why does my Revocable Living Trust use my Social Security Number — and when does it need its own EIN?

This is one of the most common questions clients ask after signing their trust documents. The answer comes down to how the IRS classifies your trust at different stages of your life. During Your Lifetime — Why Your SSN Is Used The IRS classifies a revocable living trust as a 'grantor trust.' This means the IRS does not treat the trust as a separate entity from you — the person who created it and retains the power to change or revoke it. Because you control it completely, the IRS views the trust's assets as still belonging to you for tax purposes. As a result: • All income generated by assets held in the trust is reported on your personal Form 1040 using your Social Security Number • The trust does not file its own tax return while you are alive and the trust remains revocable • No EIN is required during your lifetime After Your Death — Why the Trust Needs Its Own EIN At your death, your revocable living trust automatically becomes irrevocable. It can no longer be changed, and it becomes a separate legal entity — distinct from you, the now-deceased grantor. Your Social Security Number becomes inactive after death. Your Estate Administrator uses it one final time to file your last Form 1040. After that, the IRS will not accept any further tax returns filed under your SSN. Because the trust is now a separate taxpayer, the Successor Trustee must: 1. Apply for an EIN (Employer Identification Number) using IRS Form SS-4 — this gives the trust its own taxpayer identification

How does the IRS treat a Revocable Living Trust during the grantor's lifetime?

A Revocable Living Trust is a 'grantor trust' for IRS purposes — meaning the IRS essentially ignores the trust as a separate tax entity while the grantor is alive. Key rules during the grantor's lifetime: • Grantor pays all taxes — all income generated by trust assets is reported on the grantor's personal Form 1040 using their Social Security Number • No separate tax return required — the trust does not file its own Form 1041 while the grantor is alive • Assets included in the estate — assets held in a revocable trust are part of the grantor's taxable estate for estate tax purposes • Step-up in basis at death — assets in a revocable trust receive a step-up in cost basis to the date-of-death value, which can significantly reduce capital gains taxes for beneficiaries when they sell inherited assets In short: a revocable trust is transparent to the IRS during the grantor's lifetime. All tax responsibility falls on the grantor personally.

How does the IRS treat an Irrevocable Trust — and what are the compressed tax brackets?

An irrevocable trust is a separate legal and tax entity. The trustee must obtain a separate Employer Identification Number (EIN) and file Form 1041 annually. Compressed Federal Income Tax Brackets for Irrevocable Trusts (2025 — taxes paid in 2026): Taxable Income Tax Rate ───────────────────────────────── $0 – $3,150 10% $3,150 – $11,450 24% $11,450 – $15,650 35% Over $15,650 37% For comparison: the top individual rate of 37% applies to single filers with income over $626,350 in 2025. A trust hits that same 37% rate at just $15,650 of retained income. Long-Term Capital Gains Tax Rates for Trusts (2025): Capital Gains Rate ───────────────────────────────── Up to $3,250 0% $3,250 – $15,900 15% Over $15,900 20% Important rules: • These compressed rates apply only to income retained in the trust — not distributed to beneficiaries • Distributions of income are taxable to the beneficiary at their individual rate • Distributions of principal are not subject to income tax • Trusts may also be subject to the Net Investment Income Tax (NIIT) of 3.8%

What is IRS Form 1041 — and who is required to file it?

IRS Form 1041 (U.S. Income Tax Return for Estates and Trusts) is the annual fiduciary income tax return filed by the executor, administrator, or trustee of a domestic decedent's estate, trust, or bankruptcy estate. Form 1041 is required when: • A domestic estate has gross income of $600 or more in the tax year • A domestic trust has any taxable income during the tax year • A domestic trust has gross income of $600 or more • A domestic trust has any nonresident alien beneficiary What Form 1041 Reports: 1. Taxable income — interest, dividends, capital gains, rental income, royalties 2. Deductible expenses — fiduciary fees, attorney fees, accountant fees, court costs 3. Distributions to beneficiaries — income distributed to beneficiaries is generally deductible by the trust and taxable to the beneficiary 4. Income tax liability — the net tax owed by the trust on income it retains Schedule K-1 (Form 1041): For each beneficiary who receives a distribution of income, the trustee prepares a Schedule K-1 (Form 1041). The beneficiary includes this information on their own Form 1040. Filing Deadline: • Calendar year trusts: April 15 • Extensions available on Form 7004 (5-month extension for trusts) How Form 1041 Differs from Form 706 and Form 1040: Form 1040 — Individual income tax; filed by the grantor during their lifetime Form 1041 — Fiduciary income tax; filed annually by the trustee or executor after death Form 706 — Federal estate tax; filed once, within 9 month

What is a Section 645 Election — and when should a trustee make one?

A Section 645 election allows a Qualified Revocable Trust (QRT) to be treated as part of the decedent's estate for federal income tax purposes during an election period — meaning the trust and the estate file a single combined Form 1041 instead of two separate returns. Eligibility: • The trust must be a Qualified Revocable Trust — meaning the decedent had the power to revoke or regain control of the trust assets at the time of death • The election is made jointly by the executor of the estate and the trustee of the QRT How to Make the Election: File IRS Form 8855 (Election to Treat a Qualified Revocable Trust as Part of an Estate). The election must be filed by the due date of the first Form 1041 for the estate — including extensions. Once made, the election is irrevocable. Five Key Benefits: 1. Simplified Tax Reporting — a single Form 1041 covers both the estate and the trust 2. Flexible Fiscal Year — the QRT can adopt the estate's fiscal year, allowing income-shifting and tax deferral 3. Charitable Deductions — the combined entity can deduct amounts set aside for charitable purposes 4. S Corporation Stock — the combined entity can hold S corporation stock without a QSST or ESBT election 5. Estimated Tax Exemption — estates are exempt from estimated tax payments for the first two years of administration

What is imputed income — and how does it affect taxes on family transactions?

Imputed income means the IRS is collecting income tax on income you did not actually receive in cash — because of a choice you made. It arises most often in family financial arrangements structured informally, without regard to IRS rules. Forgiven Debts For solvent people, the amount of a forgiven debt is considered taxable income to the recipient. Forgiveness up to the annual gift tax exclusion ($19,000 per recipient in 2026) can be structured as a gift rather than forgiven debt, avoiding imputed income. Below-Market Rent to Family Members If you allow a family member to live in a property you own rent-free or at below-market rent, the IRS treats the difference between market rent and what you actually received as taxable income to you. Below-Market Family Loans — The Applicable Federal Rate (AFR) If you make a loan to a family member at no interest or below the IRS Applicable Federal Rate (AFR), the IRS imputes interest income to you and treats the difference as a taxable gift to the borrower. For any family loan above $10,000, a written promissory note charging at least the AFR is essential to avoid imputed income and gift tax complications.

What is the Applicable Federal Rate (AFR) — and what are the current June 2026 rates for promissory notes and deeds of trust?

WARNING TO CLIENTS: If you are using a promissory note or deed of trust to document a private or intra-family loan — for example, a parent lending money to a child to purchase a home, or a trust making a loan to a beneficiary — you must charge an interest rate at or above the IRS Applicable Federal Rate (AFR). Failing to do so triggers gift tax implications or imputed taxable income on interest you never actually collected. What Is the AFR? The AFR is a dynamic, monthly-adjusted federal benchmark published by the IRS under IRC § 1274(d). It sets the minimum interest rate required for private and intra-family loans to avoid adverse tax consequences. The IRS issues these rates monthly — the rate in effect when the loan agreement is signed is the rate that governs the loan. Current June 2026 AFR Rates (Revenue Ruling 2026-11) The specific rate depends on the length of the loan and how frequently interest compounds: Loan Term Annual Semi-Annual Quarterly Monthly ───────────────────────────────────────────────────────────────────────────── Short-Term (3 years or less) 3.85% 3.81% 3.79% 3.78% Mid-Term (Over 3 to 9 years) 4.13% 4.09% 4.07% 4.06% Long-Term (Over 9 years) 4.87% 4.81% 4.78% 4.76% Step-by-Step Guide to Lock In Your Rate 1. Determine Length: Choose a definitive duration for the loan to establish whether it falls under short-, mid-, or long-term brack

Can an Irrevocable Trust still get a step-up in cost basis at death?

Yes — and this is one of the most powerful advanced planning strategies available. It is possible to create an Irrevocable Asset Protection Trust, file IRS Form 709 reporting the gift to the trust (thus removing assets from the taxable estate and obtaining asset protection), and still receive a step-up in cost basis to the date-of-death value when the asset transfers at death. How it works — the Intentionally Defective Grantor Trust (IDGT): If the grantor intentionally retains certain powers in an otherwise irrevocable trust, the trust is treated as: • Irrevocable for gift and estate tax purposes — assets are removed from the taxable estate • A grantor trust for income tax purposes — the grantor continues to pay income tax on trust earnings The result: the grantor's payment of income taxes on trust earnings is itself a tax-free gift to the trust beneficiaries, and the assets may still receive a step-up in basis at the grantor's death if structured correctly. Key distinction: • Grantor Trust: grantor pays income tax on trust earnings; trust assets may receive step-up in basis • Non-Grantor Trust: trust pays its own income tax at compressed trust rates; assets generally do not receive a step-up in basis at the grantor's death

Christopher S. Mulvaney, Esq. — Attorney-and-Counselor-at-Law — Professionalism with Integrity — WSBA#33595 — Licensed Only in Washington State

[email protected]Bellevue, WA

Tax Treatment of Trusts

Trusts Overview

IRS Rules & Tax Planning

The IRS treats revocable and irrevocable trusts very differently — understanding those differences is essential.

The IRS treats revocable and irrevocable trusts very differently. Understanding those differences — and the planning opportunities they create — is essential to building an effective estate plan. This page covers the key tax rules that apply to trusts at every stage: during the grantor's lifetime, at death, and during administration.

Reference Links

Grantor Irrevocable Asset Protection Trusts Non-Grantor Irrevocable Asset Protection Trusts Disclaimer Sub-Trust Trusts Overview Schedule a Free Zoom Consultation

Ready to Protect Your Family?

MetLife Legal Plans accepted. No-cost, no-obligation Zoom consultation with Christopher Mulvaney.

Schedule a Free Zoom Consultation Trusts Overview

Tax Treatment of Trusts | Mulvaney Law Offices

Tax Treatment of Trusts

Ready to Protect Your Family?