Does an Intentionally Defective Grantor Trust Need an EIN?

An intentionally defective grantor trust does not need its own EIN in most cases while the grantor is alive and is the sole owner for income tax purposes. The trustee can report all trust income under the grantor’s Social Security number, and the trust itself files nothing with the IRS. That default changes in a handful of specific situations, most commonly when the grantor dies.

Why the Grantor’s SSN Works

An IDGT is irrevocable for estate tax purposes but deliberately treated as owned by the grantor for income tax purposes. The trust document includes a provision, often the power to swap trust assets for property of equal value under IRC Section 675(4)(C), that triggers the grantor trust rules.1Office of the Law Revision Counsel. 26 U.S. Code 675 – Administrative Powers Because the grantor is the owner for income tax purposes under IRC Section 671, the trust’s income, deductions, and credits flow straight onto the grantor’s Form 1040.2Office of the Law Revision Counsel. 26 U.S. Code 671 – Trust Income, Deductions, and Credits Attributable to Grantors and Others as Substantial Owners The trust is essentially invisible to the IRS for income tax purposes, so it needs no separate taxpayer identification number.

When the Trust Does Need Its Own EIN

Several situations require the trust to obtain an EIN regardless of what the trustee would prefer.

  • The grantor dies. This is by far the most common trigger. The person whose income was being taxed no longer exists, so the trust becomes a separate taxpayer and needs a new EIN.3Internal Revenue Service. When to Get a New EIN
  • There is more than one grantor. The EIN exception under Treasury Regulation 301.6109-1 applies only to a trust treated as owned by one grantor or one other person. Two or more owners means the trust needs an EIN. A married couple filing jointly can be treated as a single grantor for this purpose.4eCFR. 26 CFR 301.6109-1 – Identifying Numbers
  • Grantor trust status ends during the grantor’s lifetime. If the “defective” power lapses, is released, or otherwise ceases to apply, the trust becomes its own taxable entity.
  • The trustee wants to use a reporting method other than the SSN method. Two of the three approved reporting methods require an EIN. More on this below.4eCFR. 26 CFR 301.6109-1 – Identifying Numbers
  • The trust has employees. Any trust that pays wages needs an EIN for employment tax purposes, independent of grantor trust status.5Internal Revenue Service. Employer Identification Number

The Three Reporting Methods

Treasury Regulations give trustees of wholly-owned grantor trusts three ways to report activity. Only the first lets the trust skip the EIN.

Method One: Grantor’s SSN, Nothing Filed by the Trust

The trustee gives the grantor’s name and SSN to every bank, brokerage, and other payor. The trust files nothing with the IRS, and the grantor picks up all income on Form 1040. Before using this method, the trustee obtains a signed Form W-9 from the grantor confirming the taxpayer identification number. If the trustee is not the grantor or a co-trustee, the trustee must also give the grantor an annual statement listing every item of income, deduction, and credit and identifying each payor, so the grantor can prepare an accurate return.6eCFR. 26 CFR 1.671-4 – Method of Reporting That annual statement is a regulatory requirement, not optional paperwork.

Method Two: Trust’s EIN, Trustee Files 1099s

The trustee gives the trust’s own name and EIN to payors, then files Forms 1099 with the IRS reporting all the trust’s income as belonging to the grantor. The grantor still pays the tax. The trust must have an EIN to use this method.6eCFR. 26 CFR 1.671-4 – Method of Reporting

Method Three: Abbreviated Form 1041

The trustee files Form 1041, but completes only the entity information and attaches a statement showing the grantor’s name, SSN, and the income allocable to the grantor. The 1041 reports no taxable income because everything still flows to the grantor. This method also requires an EIN.

Most trustees choose Method One because it involves the least paperwork. Method Two or Three is sometimes preferred for cleaner record-keeping, but only at the cost of obtaining an EIN and filing more forms.

What Changes at the Grantor’s Death

The grantor’s death creates a clean break. Income earned by the trust before the date of death goes on the grantor’s final Form 1040. Income earned after that date belongs to the trust as a separate taxpayer and goes on Form 1041.

The trustee should apply for the new EIN soon after death. The IRS does not set a deadline in days, but the EIN is needed before the trust can file Form 1041 or give financial institutions a taxpayer identification number for post-death 1099s. Once the trust is a separate taxpayer, Form 1041 is required if the trust has any taxable income, gross income of $600 or more, or a nonresident alien beneficiary.7Internal Revenue Service. Instructions for Form 1041 and Schedules A, B, G, J, and K-1 For calendar-year trusts, Form 1041 is due April 15, with an automatic extension available by filing Form 7004.8Internal Revenue Service. Instructions for Form 1041 and Schedules A, B, G, J, and K-1

Expect logistical work beyond the tax filings. Accounts previously held under the grantor’s SSN generally have to be re-titled under the trust’s new EIN, and some institutions require opening new accounts to do it.

How to Apply for the EIN

The IRS accepts EIN applications three ways.

  • Online: The fastest option. The EIN is issued immediately upon approval. The application is available Monday through Friday from 6:00 a.m. to 1:00 a.m. Eastern, Saturday from 6:00 a.m. to 9:00 p.m., and Sunday from 6:00 p.m. to midnight.9Internal Revenue Service. Get an Employer Identification Number
  • Fax: Submit Form SS-4 by fax. Expect the EIN within about four business days.10Internal Revenue Service. Instructions for Form SS-4
  • Mail: Submit Form SS-4 by mail. Allow four to five weeks.10Internal Revenue Service. Instructions for Form SS-4

Select “trust” as the entity type and identify the responsible party, usually the trustee. You will need the trust’s legal name, the trustee’s name and SSN, the trust’s address, and either the date the trust was funded or, if applying after the grantor’s death, the date the trust became irrevocable.

Reasons to Get an EIN Anyway

Even when the trust legally qualifies to use the grantor’s SSN, some trustees obtain an EIN by choice. Financial institutions vary in how willing they are to open accounts for an irrevocable trust under an individual’s Social Security number, and some require an EIN regardless of grantor trust status. Getting one and using Method Two or Three solves that without changing how the trust is taxed. The grantor still pays every dollar of tax either way. Some grantors also prefer the privacy of keeping their SSN off documents that circulate among multiple institutions. The trade-off is the extra reporting Methods Two and Three impose on the trustee.