In spite of the name, Employer Identification Numbers (EIN) are not just for employers. All kinds of entities use an EIN as their tax identification number. In particular, if you’re setting up a trust, you need this number. To help you out, this guide provides a brief overview of trusts, looks at why they need EINS, and explains how to apply for an EIN for a trust.
What Is a Trust?
A trust is a financial relationship where one party gives another party the right to hold assets for the benefit of a third party. The person who creates the trust is called the trustor. They transfer their assets into the trust. This is called funding the trust.
The person who takes care of the trust is the trustee. They manage the assets in the trust, handle disbursements, and generally take care of the trust based on the wishes of the trustor.
Finally, the people or entities who benefit from the trust are called beneficiaries. This may include people or organizations such as charities. The trustor selects the beneficiaries.
The Purpose of a Trust
There are several different types of trusts, and their purposes vary. As a general rule of thumb, people use trusts to avoid probate when passing assets to their heirs. Trusts can also help to reduce estate taxes and protect assets from creditors.
Why Do Trusts Need a Tax ID Number?
Most trusts need an EIN so that they can file a tax return. If a trust generates income, it must file Form 1041 (U.S. Income Tax Return for Estates and Trusts). For instance, this can happen if the trust owns rental property that generates income or stocks that increase in value.
The trust tax return requires a tax ID for the trust. Unless the trust is a grantor or revocable trust, it needs its own EIN.
Do Revocable Trusts Need EINs?
Also called grantor trusts, revocable trusts have special rules about EINS. These trusts do not need EINs because they do not file their own tax returns. Instead, the grantor of the trust reports the income from the trust on their individual income tax return.
This is optional. If desired, you may opt to file a 1041 trust return. If so, the trust needs an EIN. To ensure you select the right option for your situation, you may want to consult with a tax professional.
Because these trusts are revocable, they can be revoked (canceled) at any time. If the grantor cancels the trust, ownership of the assets in the trust reverts to the grantor. The grantor uses their personal Social Security Number for the trust, rather than obtaining a unique tax ID number.
If a married couple creates a revocable trust together, they can use either of their Social Security Numbers for the trust. However, if they don’t file their tax return as married filing jointly, they will need to obtain an EIN for the trust.
Finally, revocable trusts become irrevocable trusts when the grantor dies. At this point, the trust can no longer use the grantor’s Social Security Number as its tax ID. Now, it needs its own EIN.
EINs and IRA Trusts
An IRA trust is a trust that you set up to be the beneficiary of your IRA if you pass away. While you are alive, the trust generally does not have any assets. As a result, it typically doesn’t earn any income and doesn’t need to file a tax return. By extension, it does not need an EIN.
However, if the trust earns money from other sources, it may need to file Form 990-T (Exempt Organization Business Income Tax Return). In this case, the IRA trust needs an EIN.
How to Obtain an EIN for a Trust
Now that you understand why you need an EIN for a trust, you’re probably wondering how to apply. Luckily, the process of applying for an EIN for a trust is relatively straightforward. You can apply through the mail or over the phone, but if you want your EIN as fast as possible, you should apply for an EIN online.
When you apply for a trust EIN online, you don’t have to drive anywhere, stand in line, or meet with anyone. Instead, you can take care of the process from the comfort of your home or the trustee’s office. Often, you get the number the same day or relatively quickly after you apply.
Information Required to Obtain an EIN for a Trust
To apply for a trust EIN online, start by gathering the following details about the trust:
- Legal name of the trust.
- Mailing address.
- Trustee’s name.
- Trustee’s Social Security or Tax ID Number.
- The reason you’re applying for an EIN.
- Date the trust was founded.
- Whether or not the trust plans to employ anyone.
In most cases, you will select “created a trust” as your reason for applying for an EIN. However, as indicated above, some trusts don’t need an EIN until after they are created. In this case, you may want to select “other” as your reason for applying for an EIN.
Then, you should explain the reason that you need the EIN. For instance, if you’re applying for a grantor trust created by a couple who decided to file their taxes separately this year, you can note that as your reason. Similarly, if you need an EIN because a revocable trust became irrevocable after the death of the grantor, you can note that on your online EIN application.
Sometimes, trusts have to open bank accounts. If this is the reason you’re applying for an EIN for the trust, you should note that on your application. In some cases, trusts need to hire employees. If this applies, you should note that as the reason you’re requesting an EIN.
Once your trust has an EIN, you can start using it right away. You can use it on tax forms, banking documents, or any other paperwork that requires a tax ID for the trust. Now that you understand the process, you’re ready to apply for a trust EIN online.