Gosh – now I’m doing the CSS Profile and I have a new question. On my daughter’s info it asks how much she has in investments. Then how much she owes on those investments. THEN it ask how much is in all trusts. Should I list the investments (which are in the trust) and then again list the amount in the trust? It seems like the same question and that they might think there is double the money. I think I should just list the money in the trust and not list anything under investments.
@annoyingdad, thanks for explaining that and somewhere upstream it was explained that the child’s dividend income although reported on parents’ return won’t be included in the parent AGI. Otherwise if the parent puts the amount in the student section of FAFSA it might have been counted twice. I just was wondering if the irs retrieval tool would transfer everything over from the parent return, even the child’s dividends.
Don’t use H&R Block, or any other service that you have to pay for. The IRS has Free File (online tax preparation software with free electronic filing) and Free File Fillable Forms (free electronic filing). Completing and filing a 1040A for your daughter should be painless and free, and you will likely pay less tax than if you include her investment income on your return.
Yes, and as you point out, capital gains implications must be factored in when considering liquidating assets to invest in a 529.
If the trust was funded with yearly gifts that were under the annual gift tax exclusion amount, than there is nothing to resolve - gift tax is not and never was a factor.
If the investments are all in a trust, than just list the trust assets under the question about trusts. The question about investments is for investments that are not part of a trust.
MiddKid86 – wow thanks for all your answers. Very helpful.
On this one:
“If the trust was funded with yearly gifts that were under the annual gift tax exclusion amount, than there is nothing to resolve - gift tax is not and never was a factor.”
You are right. I think what was going on in my mind is if I tried to change her trust into being our (parents) assets to get try to get around he 20% student assets problem. My dad and daughter would be amenable to changing the trust and the assets into our name – but that gift exclusion would then have to be resolved.
One more thing since you seem to know all this stuff – could you clarify – If I don’t file a separate return for my daughter – what should I say in the part of the FAFSA where it asks the student 'have you completed your IRS tax return or another tax return?" 1. Will not file ? 2. will file ?
If I put ‘will not file’ then the form gives me no spot to include her dividend income – only spot to put wage, tips income.
Is this investment income coming from assets within the trust? If so, is the trust a simple trust or a complex trust? Is the trust income being paid to your daughter on a yearly basis?
Is the trustee completing a Form 1041 for this irrevocable trust?
I think it is a complex trust since nothing is distributed to her – the dividends are reinvested. I hope I have not been filing incorrectly all this time. I have been reporting her income on my taxes when her unearned income was up to the amount where you need to declare – I think 1000. The income is from dividends within the trust. My son also has a trust but it is smaller and the dividends have never been more than 1000 so I have not filed anything for him. The income for her has just surpassed 1000 once I think in 2012. Not in 2013. Has to do with Disney dividend distribution changing. I think I have only reported her trust income that once in 2012. I am not doing form 1041.
If the dividends are from trust assets and they are reinvested and not distributed to a beneficiary, then it is not your daughter’s income - it belongs to the irrevocable trust, a separate legal entity. The trustee should be filing a Form 1041 in this case to report the trust income. I don’t think it can go on the return of the beneficiary’s parent(s).
Anyway, if I am right about this, it solves your original problem: the trust income is not reported on FAFSA. The trust assets are reported in question 42 if your daughter is the trust beneficiary.
A complex trust is allowed a standard $100 exemption. All other income above that amount is subject to tax. However, if most or all of the income from your daughter’s trust is qualified dividends and/or long term capital gains, the tax bill will likely be very low.
I do have experience filing Form 1041 for one type of trust, but I am by no means an expert. Besides, you don’t even know me - never rely on financial advice from a stranger over the internet. You should consult with a CPA or qualified tax preparer.
Sounds like OP has been treating it as a grantor trust?
MiddKid86 – I will get more advice but I do appreciate your advice here. It has made me research this info and I think you are right that I need to file the 1041 – on any trust that has income of more than $600. And it does solve the FAFSA problem. Again, thanks.
Madison85 – once I figured out what ‘OP’ meant I understand your comment 
I looked up grantor trust and that would involve the tax reporting and paying going on my dad’s tax return I think. So I’m not treating it like that.
To tell the truth I guess I have been treating my childrens’ trust responsibility too lightly. I had better get some CPA advice.
Thanks to you all!
Madison85 – I figured it out - that what my daughter has is a Crummey Trust. So you might be right about ‘grantor trust’ with respect to our trust. And if so – it appears the dividend income tax reporting can just go on my return and I don’t have to do a trust return. See the following:
"The Crummey Power Trust
For those donors troubled by the mandatory age 21 termination requirement of the IRC Sec. 2503© trust or the present income distribution requirements of the IRC Sec. 2503(b) trust, various devices have been utilized that take advantage of the annual gift tax exclusion by virtue of the so-called Crummey Power. The Crummey Power, named after the Ninth Circuit case, Crummey v. Commissioner, has evolved into a power of a beneficiary to withdraw from the trust on an annual basis an amount equal to the annual exclusion in any year where transfers are made to the trust. Since the beneficiary has the power to withdraw, even if not exercised, the gift of a future interest problem is obviated, and the gift will qualify for the annual exclusion."
And since in a Crummey Trust the beneficiary has been presented the money and given a time limit to withdraw it – the beneficiary is essentially the grantor – as it says below:
“With respect to the income tax consequences, generally the income from the trust, though not distributed, should be included on the beneficiary’s personal income tax return pursuant to Sec. 678. Here, the child is now considered the grantor of the trust by having the right of withdrawal.”
So – I think I can just say she is not filing a return, then account for her income on my return under her name – and since grantor trusts don’t require 1041/K-1, I don’t have to file those. What do you think? I will still consult a CPA but I thought this was interesting info…
Form 8614 can be used to report your child’s interest, dividends, capital gains distributions on your (the parents’) tax return.
BUT does your child ever sell these investments thus generating capital gains/losses (does the child ever receive Form 1099B)?
@Ripple1969
I found the article that you quoted from. Several comments:
It’s an older article - the author talks about the annual gift tax exclusion being $10,000, which hasn’t been the case since 2001. What you are reading is the opinion of one CPA from at least 14 years ago. Getting a current opinion, as you say you are planning to do, is a good idea.
The trusts that I administer and file 1041 forms for are complex (non-grantor) trusts with Crummey powers, similar to what you have described your kids having, and I have never heard of the idea that under a such a trust the beneficiary is considered the grantor simply by having the right of withdrawal - whether that right is exercised or not - and that as a substitute for the grantor the trust income can now be declared on the beneficiary’s income tax form. Maybe this would work with a grantor type trust that is set up as a Crummey trust, but I don’t think it would work with a non-grantor type trust set up as a Crummey trust, which is what I am familiar with and based on your description it sounds like your children have.
Obviously it’s difficult to provide detailed advice without having access to the trust document and knowing exactly what the terms of the trust are. But if the trusts that your father set up are irrevocable trusts with you as the trustee and your kids as beneficiaries, they probably aren’t grantor trusts and they likely should be filing tax returns (if required) as separate legal entities. Again, just my non-expert opinion.
Madison85 asks a good question, which is who are the 1099 forms addressed to that document the income generated by the trust?
This is how the 1099 forms are addressed. I’ve substituted the name ‘Smith’ in place of our real name. I’m Alex.
ALEX SMITH TTEE
U/A DTD 12/18/1997
SMITH GRANDCHILDREN
IRREVOCABLE TRUST
1099-DIV Dividend Distributions - 2013 Statement for recipient (Copy B)
And no, these are individual stocks and I have not sold any to incur capital gains. I have two trusts for two children. The trust don’t have their individual names on them but there are two with the same stocks but lesser amount for the second child because the gifts from my father stopped.
Am I correct in assuming that each trust has its own separate tax identification number? If each of your kids is the beneficiary of one of these trusts, it sure sounds like you have non-grantor trusts. Your father has given up control of the trust assets and income by making the trusts irrevocable, designating you as the trustee and naming your children as the beneficiaries. The trust income would not be reported on his tax return, and since it’s not distributed currently to your daughter, I don’t believe that it should be reported on her (or your) tax return.
As I mentioned earlier, if most of the trust income is qualified dividends and/or long term capital gains that is reinvested, the taxes owed may be minimal.
Yes, each trust has its own separate id number such as this: beginning in 95-xxxxxxx. I will consult CPA and it seems I will be filing tax returns for the each Trust as you all thought from the beginning. I am a little nervous now though since I have not been doing this in years past – I have been reporting on my return but only if the income was more than 1000. I think it needs to be reported for over $600 for Trusts. I know this is not much money to the IRS so therefore I hope I’m not in too much tax trouble. Oy vey. Well at least this clears up all the FAFSA and CSS questions! : )
Thanks – I appreciate all your guys’ input. I am curious about something though. I am new to this site since my first child is just now applying to college. Some of you has thousands of posts to your name on this site I see. Do you do this to help people out – it is very nice of you to take the time…
By including the trust income on your return, you may very well have been paying too much. The only way to know for sure, however, would be to go back to the previous years and do some forensic accounting.
I have just finished reading this thread and I am still confused (and interested because I am in a similar situation). Who is the “owner” of an irrevocable non-grantor trust with its own separate tax ID number if the student is the beneficiary? Also, does the student beneficiary have to report the income from the trust as student income if the trust files a return and pays the taxes every year? (In other words, the income from the trust does not appear on the student’s tax return). Thanks for your help.
Well, the Trust (a separate legal entity) is the legal owner of the assets it holds, to be used for the benefit of the beneficiary, as dictated by the terms of the Trust document.
No, not if there is no requirement that the Trust distribute current income to the beneficiary. If that were the case, the student/beneficiary would be taxed on that income, and the Trust would claim it as a deduction on the Trust’s tax return.