The Liquidating Trust is intended to be treated as a “grantor trust” for federal income tax purposes.As such, the tax consequences to a unitholder generally will be similar to those that would be experienced if the trust were treated as a partnership.You must also complete a small identification section of Form 1041 and file it, although you don't have to report trust income.The trustee of an irrevocable trust must complete and file Form 1041 to report trust income, as long as the trust earned more than 0 during the tax year.If the units are held in a taxable account, this information should be used in determining your taxable income.If your units are held in a tax-exempt or qualified account you should send a copy of the Grantor Letter (include all pages) to the trustee or custodian of your account.
Currently, 46 states and the District of Columbia have adopted some form of the 1997 UPAIA (see RIA Checkpoint, "List of States Following One of the Revised Uniform Principal and Income Acts," Table T309).The implementation of the Uniform Principal and Income Act of 1997 (UPAIA) and the 2004 revisions to the regulations under Sec.643 have provided fiduciaries with some flexibility in making distributions of capital gains to beneficiaries. Additionally, advisers should consider the grantor trust rules and how they may provide further options for income shifting.The trustee or custodian will need this information to prepare your annual account statement.Tax-exempt accounts include Individual Retirement Accounts (IRAs) and other qualified accounts such as 401(k) plans, SEP IRAs, 403(B) accounts and profit sharing plans.Revocable and irrevocable trusts are treated quite differently under U. Creating a trust may carry unexpected tax consequences, some of which may be unfavorable. The main reason for this disparity is that the assets of a revocable trust are considered the property of the grantor, while an irrevocable trust is treated as an independent legal entity that owns its assets.A trust may earn income in the form of interest on funds held in a bank account, for example, or rent paid by a tenant living in a house owned by the trust.If you create a revocable trust, known as a grantor trust by the IRS, all trust income is taxed as your personal income, and you must report it on your Form 1040 tax return even if it remains in the trust.Tax advisers should understand the options available under state law, including the "power to adjust" and "unitrust" provisions, and how those provisions intersect with Regs. FAI, also referred to as trust accounting income, is determined by the governing instrument and applicable local law.Although it is not a tax concept, FAI is important in determining whether the fiduciary or beneficiaries pay tax on the trust's income.