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Imagine Paul sets up a defective irrevocable grantor trust for his daughter Mary. After the death of Paul, does the trust have to get an EIN number and file a separate tax return? Is there a way that Paul could have set it up such that Mary would not have to file a separate tax return for the trust?

I am in the United States. Also assume that the trust is govern by the UTC (Uniform Trust Code).

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Imagine Paul sets up a defective irrevocable grantor trust for his daughter Mary. After the death of Paul, does the trust have to get an EIN number and file a separate tax return.

Yes.

Is there a way that Paul could have set it up such that Mary would not have to file a separate tax return for the trust?

Not really, without effectively distributing the trust in full at the time. Trusts that are not grantor trusts and are not charitable trusts of some kind, are either simple or complex trust. But, both kinds of trust have to file a separate tax return, even though, in the case of a simple trust, this is often not a difficult return to prepare.

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  • It seems to me that the ideal trust would be a grantor trust that continues as a grantor trust after the grantor has dies. Does such a trust exist?
    – Bob
    Apr 28, 2022 at 0:34
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    @Bob No. There are trusts that are taxed as a grantor trust in which the person treated as a grantor is someone other than the true settlor of the trust because the person has such great power over the trust assets (e.g. a general power of appointment over the trust res, i.e. a right to take money out of the trust at any time not subject to fiduciary duties). But doing so generally defeats the purpose of having a trust in the first place. A simple trust is very similar to a grantor trust in substantive tax treatment but does require its own tax return.
    – ohwilleke
    Apr 28, 2022 at 17:04
  • I have been told by a lawyer who specializes in Wills and Trusts that the answer is yes. That is, after the grantor dies the trust can report under the Social Security number of the beneficiary.
    – Bob
    Apr 29, 2022 at 13:48
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    @Bob You are supposed to have a separate EIN and tax return for both a simple trust and a complex trust. As I noted, it is possible to have a trust taxed as a grantor trust in which the person treated as a grantor is someone other than the true settlor, but a trust with terms that made that possible wouldn't be very common and I'm not sure what purpose it would serve. As a general rule I would respectfully disagree, but perhaps someone else it more familiar with the details of your particular fact pattern.
    – ohwilleke
    Apr 29, 2022 at 19:15
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    @Bob If there is a reason that it is, this is not the reason. An IDGT does not qualify as a trust for income tax purposes because the grantor, a living human being, has certain rights over the trust that prevent the trust from becoming distinct from the grantor for income tax purposes. When the grantor is dead that is no longer true.
    – ohwilleke
    Apr 29, 2022 at 22:42

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