What is an Ohio Trust (and When Does it Have to file an Ohio Tax Return)?
A trust is a legal tool that splits legal ownership of assets from the ability to benefit from those assets. In a moment, we'll get to the question of why anyone would want to do that. First, let's talk about how a trust works.
A trust involves three roles: the grantor, also known as the trustmaker; the trustee; and the beneficiary or beneficiaries. For living revocable trusts, commonly called "living trusts," the same person can serve in all three roles, at least initially. The grantor creates and funds the trust by putting assets in the trust's name. The trustee manages the assets and distributes them for the benefit of the beneficiary. If you create a living trust to hold your assets, you can continue to manage and use them just as if they were in your own name.
Why Should You Have an Ohio Trust?
Which brings us back to the question: if you can manage and use the assets in a living trust just as if they were in your own name, why create a trust at all? Why not keep the assets in your own name? As it turns out, there are several good reasons to create a trust.
Many people who create a living trust do so to avoid probate. Assets owned in your own name must go through probate, which involves time, effort, and expense. Assets in a trust, however, remain in the trust. They are managed by a successor trustee who takes over after the death of the grantor/original trustee. The assets can be immediately distributed to beneficiaries or continue to be managed within the trust; what happens depends on the terms of the trust document.
That's another reason to have a living trust. With the trust document, you can place some conditions on the use and distribution of trust assets after your death. Without a trust, your heirs would receive all of their inheritance at once, and be free to do with it whatever they liked.
A trust can also help you during your lifetime. In the event that you become incapacitated and unable to manage your affairs, a successor trustee of your choosing will step in to manage the trust for you. This avoids your loved ones having to go to court to pursue guardianship over you and your finances.
Ohio Trusts and Income Tax
How are Ohio trusts taxed? If you have a living trust, you can report trust income on your personal income tax while you are alive. After you die, however, the trust that you had the power to revoke during your lifetime becomes irrevocable. It is a separate legal entity, and needs to be taxed as such.
Your successor trustee will need to obtain an Employer Identification Number (EIN) as a tax identification number for the trust if you did not do so during your life. The easiest way to do this is to apply online via the IRS website.
Once the trustee has an EIN for the trust, he or she can fill out an income tax return form. The form for trusts, as well as for decedents' estates, is IRS Form 1041 for federal returns and Ohio IT 1041 for state returns.
A trust may not need to fill out an income tax return, but even if it is not required, doing so is usually a good idea. A federal income tax return is required for a domestic trust if any of the following apply:
- the trust had taxable income for the tax year;
- the trust had $600 or more in gross income for the tax year, regardless of whether there was any taxable income (taxable income = gross income - deductions);
- A beneficiary of the trust is a nonresident alien.
When must a trust file an Ohio tax return? If the trust is not on the list of excluded trusts, which we'll discuss below, and it meets one or more of the following criteria, the trustee, also called the fiduciary, must file an Ohio IT 1041:
- the trust resides in Ohio;
- the trust earns or receives Ohio source income;
- the trust earns or receives lottery winnings, prizes, or awards paid by the Ohio Lottery Commission;
- per the U.S. Constitution, the trust has nexus with Ohio.
Revocable living trusts of the type we have been discussing are generally not excluded from filing an Ohio income tax return, but the following types of trusts are excluded:
- Charitable remainder trusts
- Grantor trusts
- Pre-need funeral trusts
- Qualified funeral trusts
- Retirement trusts
- Endowment and perpetual care trusts
- Qualified settlement trusts
- Retirement trust funds
There are, of course, circumstances under which a trust which would ordinarily be required to file an Ohio return need not do so. If the trust's federal Form 1041 shows no taxable income or negative taxable income, and the trust did not earn or receive any business income or nonbusiness income apportioned to Ohio, and there are no Ohio adjustments that would result in Ohio taxable income, the trust does not have to file Ohio IT 1041.
Even if a trust is not required to file an income tax return, it might be advantageous to do so in certain situations. If you are a fiduciary and are unsure whether or not to file an income tax return for a trust, contact an experienced Ohio probate, trust and estate attorney.
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