Estate planners scurrying to set up trusts on behalf of wealthy clients and fund them with tax-free gifts before the end of the year hit a new snag this week. On the IRS website page where they would normally go to apply for a tax identification number for the trust, the following notice has appeared since Thursday:
“Planned Outage: December 27 – January 2, 2013”
If you procrastinated and waited until the last minute to set up a trust and fund it with tax-free gifts before the end of the year, you may just be out of luck.
A Forbes recent article, “IRS Is Grinch Who Stole Tax ID Numbers,” explains how trusts are taxable entities and need a tax identification number – most estate planners use an Employer Identification Number (EIN). In most situations, the online application found on the IRS website can be completed in a matter of minutes. A notice posted on the IRS website, however, states that the online EIN application will be unavailable beginning 4:00 p.m. EST on Thursday, December 27, 2012 until approximately 6:00 a.m. EST on Wednesday, January 2, 2013.
A possible way around this latest snag is to form a grantor trust – a trust in which the person who creates the trust, the grantor, retains certain rights or powers. A grantor trust is not treated as a separate entity for income tax purposes and therefore, the grantor’s social security number can be used to form the trust.
One downside to a grantor trust is that the grantor, rather than the trust or its beneficiaries, must pay taxes on any trust earnings. But the grantor can limit any taxes due by releasing the grantor trust powers and applying for an EIN when they are available January 2, 2013.