A husband and wife with separate trust accounts want to open a checking account with their trusts listed as owners as tenants in common. The account would be opened using only the tax ID of the husband’s trust, and checks made out to either trust would be deposited into the account. Each trust would own a percentage of what is in the account, and when either the husband or wife dies, their trust’s assets would go to their individual beneficiaries. Can we set up a checking account like this, and would there be any negative tax implications?

No, we would not recommend allowing two separate trusts to open a joint checking account, as this arrangement could risk the commingling of funds between two separate entities. Further, distributions from such an account could be susceptible to dispute by each trust’s respective beneficiaries, and this arrangement could cause a trustee to breach their fiduciary duties under the Illinois Trust Code, including the duties to administer the trust prudently, protect trust property, and keep adequate records for the trust.

This account arrangement also could have negative tax implications. Trusts generally must file Form 1041, U.S. Income Tax Return for Estates and Trusts, for each taxable year in which the trust has $600 in income or the trust has a non-resident alien as a beneficiary. However, trusts classified as “grantor trusts” (such as revocable trusts) may instead report all items of income and allowable expenses for the trust on the grantor’s own Form 1040 or 1040-SR, U.S. Individual Income Tax Return. In either case, the comingled funds could make it difficult to determine each trust’s annual income for tax reporting purposes, since each trust would own a set percentage of the account which may not reflect their actual account contributions.

A potential solution is for each trust to open its own, separate account with your bank to avoid the comingling of funds.

For resources related to our guidance, please see:

Illinois Trust Code, 760 ILCS 3/804 (“A trustee shall administer the trust as a prudent person would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution.”)

Illinois Trust Code, 760 ILCS 3/809 (“A trustee shall take reasonable steps to take control of and protect the trust property.”)

Illinois Trust Code, 760 ILCS 3/810 (“Recordkeeping and identification of trust property.

(a) A trustee shall keep adequate records of the administration of the trust.

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(c) Except as otherwise provided in subsection (d), a trustee not subject to federal or state banking regulation shall cause the trust property to be designated so that the interest of the trust, to the extent feasible, appears in records maintained by a party other than a trustee or beneficiary to whom the trustee has delivered the property.”)

IRS, Abusive Trust Tax Evasion Schemes – Questions and Answers (“Q: Do trusts have a requirement to file federal income tax returns? A: Trusts must file a Form 1041, U.S. Income Tax Return for Estates and Trusts, for each taxable year where the trust has $600 in income or the trust has a non-resident alien as a beneficiary. However, if the trust is classified as a grantor trust, it is not required to file a Form 1041, provided that the individual grantor reports all items of income and allowable expenses on his own Form 1040 or 1040-SR, U.S. Individual Income Tax Return. Thus, the grantor/individual would pay the total tax liability upon the filing of his return for that taxable year.”)

IRS, Abusive Trust Tax Evasion Schemes – Questions and Answers (“Q: What is a grantor trust? A: ‘Grantor trust’ is a term used in the Internal Revenue Code to describe any trust over which the grantor or other owner retains the power to control or direct the trust's income or assets. If a grantor retains certain powers over or benefits in a trust, the income of the trust will be taxed to the grantor, rather than to the trust. (Examples, the power to decide who receives income, the power to vote or to direct the vote of the stock held by the trust or to control the investment of the trust funds, the power to revoke the trust, etc.) All ‘revocable trusts’ are by definition grantor trusts. An ‘irrevocable trust’ can be treated as a grantor trust if any of the grantor trust definitions contained in Internal Code §§ 671, 673, 674, 675, 676, or 677 are met. If a trust is a grantor trust, then the grantor is treated as the owner of the assets, the trust is disregarded as a separate tax entity, and all income is taxed to the grantor.”)