Trust taxation and GST
Date: 2026-06-13
Federal rules from acquired IRS sources; Illinois has no separate GST tax. Educational only.
Three federal transfer taxes
| Tax | Trigger | Return | Exemption era (verify year) |
|---|---|---|---|
| Gift | Taxable gifts by donor | Form 709 | Unified with estate basic exclusion |
| Estate | Decedent's taxable estate | Form 706 | $13.99M (2025); $15M (2026) per IR-2025-103 |
| GST | Skip-person transfers | 709 (lifetime) / 706 Sch. R (estate) | GST exemption parallels basic exclusion amount |
Unified credit: lifetime gifts that use exemption reduce estate/GST exemption available at death (tracked on Form 709).
Trust income tax (Form 1041)
| Trust type | Income tax taxpayer | Filing |
|---|---|---|
| Grantor trust (most RLTs during life) | Grantor | Income on grantor's 1040; optional 1041 informational |
| Irrevocable non-grantor trust | Trust (distributions to beneficiaries via DNI) | Form 1041 + K-1; compressed trust brackets |
| Post-death former revocable trust | Trust as separate entity | New EIN; 1041 until termination; consider §645 election with probate estate |
| Simple trust | Beneficiary for distributed accounting income | 1041; must distribute income currently |
| Complex trust | Trust and beneficiaries per tiers | 1041; discretionary distributions limited by DNI |
Illinois: grantor trusts generally do not file IL-1041; non-grantor trusts may owe IL income and 1.5% replacement tax. See il-1041-instructions-summary.
Estate tax and marital planning
- Bypass trust: uses first decedent's exclusion; not marital-deduction property; keeps growth out of survivor's estate.
- QTIP trust: marital deduction at first death with §2056(b)(7) election; QTIP assets included in survivor's estate at second death.
- Illinois: separate Illinois QTIP election on Form 700 since 2009; no DSUE portability for IL estate tax.
GST tax mechanics
GST tax applies to transfers to skip persons (generally grandchildren and lower generations, or unrelated persons more than 37.5 years younger).
| Transfer type | Description | Typical reporting |
|---|---|---|
| Direct skip | Gift or bequest outright to skip person | 709 Sch. D (lifetime) or 706 Sch. R (death) |
| Taxable termination | Interest in trust ends, skip person becomes beneficiary | 706/709 GST schedules |
| Taxable distribution | Distribution from trust to skip person | Form 706-GS(D) or 706-GS(T) as applicable |
GST exemption and allocation
- Each individual has a GST exemption amount indexed with the estate basic exclusion (verify in Form 709 instructions for gift year).
- Allocate exemption on Form 709 Schedule D (lifetime) or Form 706 Schedule R (estate) to trust transfers.
- Automatic allocation rules may apply to direct skips and certain trusts unless taxpayer elects out on a timely filed return.
- Inclusion ratio: unallocated GST exemption → trust may be partially or fully subject to GST tax on future skip transfers.
- Dynasty trusts: long-duration trusts designed to hold GST-exempt property for multiple generations; Illinois prudent-period rule limits duration.
Crummey and ILIT note
Gifts to irrevocable trusts (including ILIT premiums) may be present-interest gifts qualifying for annual exclusion if Crummey withdrawal powers are valid. GST allocation still required for skip-person beneficiaries even when gift tax is zero.
NIIT
Estates and trusts may owe 3.8% net investment income tax (Form 8960) at low income thresholds vs individuals. See irs-documents i8960 summary.
Related notes
IRS sources (irs-documents notebook)
- i709-gift-tax-instructions-summary
- i706-estate-tax-instructions-summary
- i1041-estates-trusts-instructions-summary
- p559-survivors-executors-administrators-summary