Many people choose to protect and manage their assets or money through trusts. It is a legal entity, may generate income, so many wonder if they have to obtain the Employer Identification Number for tax purposes.
IRS typically recommends that all legal entities obtain their unique tax ID (EIN) number. However, if you are confused about whether you will need an EIN (Employer Identification Number) or not, you can get your answer here.
DOES A TRUST NEED A TAX ID (EIN)?
The trusts are created under state law; however, if they meet the tax liability, they will have to pay the federal and state taxes. Now, for tax purposes, every legal entity needs to have an EIN when taxes are filed separately.
The type of trust you have set up and the degree of authority you have over it determine the EIN requirement for trusts. Trusts typically have two types: revocable and irrevocable trusts.
A revocable trust means a living trust that can be terminated or dissolved, where the grantor (trust creator) has control, whereas an irrevocable trust cannot be changed.
Now, based on the type of trust, let’s see if you would need the tax ID (EIN) number or not:
- Revocable Trust
- If the grantor includes the trust income in their tax return, they would not need the EIN as it can be filed via SSN/ ITIN.
- This generally happens in the revocable trust as the grantor has full control, so you may not need the EIN.
- The revocable trust would also need the EIN at a certain point, as after the death of the grantor, an EIN would be required for the distribution of the trust, as it will become an irrevocable trust.
- Irrevocable Trust:
- With an irrevocable trust, it’s essential to obtain an EIN for filing a tax return, as the grantor has no control over assets.
- The taxation on the irrevocable trust depends on who is getting the advantage of the trust revenue, so it is essential to have an EIN.
Based on the type of requirement for the EIN, we can say the revocable trust may not need the EIN, while the EIN is a must for the irrevocable trust; however, under certain conditions, even the revocable trust would need the federal tax ID number.
What are the other reasons to obtain an EIN for a trust?
Trusts are legal entities that are either formed during the lifetime or based on a will after the person’s death. It is a legal arrangement where one person manages the money or assets for someone else’s benefit.
If you are curious why the IRS suggests that organizations, trusts, or estates get an EIN, even if they do not need it, you can check the following reasons:
- An EIN will be needed to establish a bank account in your business name in any financial institution, as the EIN is a financial identity.
- It will help you hire employees if the trust is needed and create a retirement plan for them, and other things.
- If the trusts have to pay state taxes, they may need to obtain a state tax ID number, where an EIN will be required to validate their application.
What would you require to obtain the EIN?
With the above discussion, you may have understood that at some point, you may need to obtain the federal tax ID for your trust to report the trust income and deductions. So, to obtain the federal tax ID number, you must prepare the following information:
- You must register the trust as a legal entity with the respective state authority, as it is formed based on state law, so it must meet the state rules.
- You will need your trust agreement revealing, trust name, trustor, trustee, or beneficiary name, and whether the trust is revocable or irrevocable.
- If the trustee is managing the trust, the form would need the trustee’s SSN or ITIN and mailing address.
- You would need trust details, like trust type, who created the trust, date of trust creation, and others.
How can you get the EIN for your trust?
The EIN application is fast and easy on the IRS online tool, EIN Assistant, so if you wish to obtain the EIN for your trust, you can use the tool in the following steps:
- Go to the EIN assistant direct link and select your entity type “Trust.”
- Now, enter your trust details, such as name, location, type, and others.
- Now, the trustee needs to enter their SSN/ ITIN and mailing address.
- After that, you should review the entire EIN application and see if all the information is valid before clicking the Submit button.
The online application can make the tax ID number available in a single day, and you can get the confirmation letter with your unique nine-digit number.
The need for an EIN varies depending on the type of trust, but there are several additional reasons to get one, so if you are forming a trust, be sure to get one, even if you don’t need it right now for tax purposes, to properly administer it.
