By Peter Smith
When it comes to managing a trust, ensuring a smooth process has a lot to do with knowing the rules and paying attention to the details. For instance, if you are the trustee of a trust, did you know that you need to get a separate tax identification number for the trust?
The only scenario in which a new tax ID number is not needed is if you, as trustee, are also the surviving spouse and everything has been left to you outright or in a revocable trust. In such cases, you can use your Social Security number since, in essence, you are the rightful owner of any assets.
In any other scenario, however, you must apply for a separate tax ID number called an EIN, which stands for “employer identification number.” This number operates much like a personal Social Security number for the trust. You’ll need it in order to open a bank or brokerage account for the trust because financial institutions use the EIN to report any interest earned on such accounts until funds are distributed to the beneficiaries.
The danger of not having an EIN
It’s important to note that you should not attempt to avoid the need for an EIN by distributing the trust’s assets immediately.
While it may seem logical that expedited distribution would eliminate any interest earnings and, therefore, also the need for the tax ID number, such a tactic actually puts you at financial risk. It’s imperative that you allow enough time to ensure that all expenses and tax debts associated with the trust have been fully settled.
It’s not uncommon for a trust liability to come to light months into the process, and if the trust’s assets have all been distributed, the trustee is then in the awkward position of having to either pay the debt personally or contact beneficiaries to try and recover some of the distributed money.
How to get an EIN
Luckily, getting an EIN is not a difficult process. The most convenient way to apply is via the IRS website, www.irs.gov. The most efficient way to do this is to print out a hard copy of the form (it’s called the SS-4 application form) and fill that out first so that you know you have all the information you need before you begin completing the online version of the request.
Of course, if you need any guidance about how to best establish or manage a trust, contact us, we are here to assist you.