An Employer Identification Number (EIN) is assigned by the Federal Government, through the IRS, in order to identify and monitor a business entity’s tax activities. Yet, it seems many people are still confused on how it works, specifically, when it comes to trusts.
This article seeks to help with that by briefly explaining its function in a trust. It explains in simple terms what a trust is and why an EIN is necessary for such.
What is a Trust?
So, before anything else, we need to establish the definition of a trust. Put simply, a trust serves as a legal arrangement between the grantor and the beneficiaries. It stipulates specific rules and conditions for property held in trust for the latter. Now, you may be wondering what the exact purpose of this agreement may be.
It is actually rather straightforward. By placing one’s property into a trust, one would be able to achieve a number of different goals. For instance, your property will become immune to estate taxes. In addition to this, you would also be able to avoid probate. This means you can save a significant amount of time and money in the event that an untimely death befalls you.
It is vital that readers understand a trust’s component parts. Namely, these are the principal, the interest (dividends earned by the principal), and the profits (capital gains). Take note that it is the grantor who decides on the rules and stipulations which will determine who gets which among the three components of the trust.
In addition to all of that, there are also secondary benefits to a trust. Most people use it in order to assert greater control over their wealth and assets. Not only that, the trust also provides an additional layer protection for one’s personal legacy from their heirs’ creditors. However, perhaps one of its most useful benefits is the increased privacy it offers for one’s assets as a trust falls neatly outside of public probate.
Types of Trusts
It is also worth mentioning that there are actually two kinds of trusts. They differ in a few fundamental aspects, so pay close attention.
- Revocable Trust – The first kind of trust is called the revocable trust, also commonly known as a living trust. The defining attribute of it is that its provisions, rules, and specifications may be altered or altogether canceled by the grantor.
In terms of documents needed, a revocable trust makes use only of grantor’s social security number. This is vital for purposes of identification. Any income from the trust is directly reflected on the grantor’s tax return.
- Irrevocable Trust – On the other hand, an irrevocable trust is quite the opposite. Its rules and provisions cannot be modified or terminated. In order to do that, one would need the permission of the trust’s beneficiaries. This is because the grantor transfers their assets into the trust, thereby removing their previous rights of ownership. Needless to say, an alternative EIN would be required for this task.
This article explains the dynamics of a trust and which type needs an EIN. Luckily, getting an EIN is as simple as filling up an SS4 Form.