Need help with Grantor Trusts and 1099-NEC reporting requirements

So would it make a difference if the daughter has her own registered investment business where she manages money for other clients too? Or does the family relationship still make this a gray area?

I'm curious about this too. Also, does it matter how the trust document is written? Like if it specifically mentions compensation for management services versus if it's just an informal arrangement?

If the daughter has her own registered investment business and is providing the same professional services to the trust that she provides to other clients, that strengthens the case for issuing a 1099-NEC. The family relationship doesn't eliminate reporting requirements when there's a legitimate business service being provided. As for the trust document, yes, that can definitely impact the situation. If the trust instrument formally establishes a compensation arrangement for management services, that creates a stronger case for treating these as business payments rather than informal family assistance. The more formal and business-like the arrangement, the more likely a 1099-NEC would be required.

How does taxr.ai work exactly? Like do you just upload your documents and they tell you what to do? Is it actual tax pros reviewing things or just some AI thing?

I've never heard of this service. What makes you think they're more reliable than just asking a regular CPA? Trust taxation is pretty specialized and I'm skeptical about online tools handling these edge cases correctly.

You upload your documents (trust agreements, financial statements, etc.) and their system analyzes them, then tax professionals review the specifics of your situation. For my grantor trust question, they flagged the key provisions in my trust document that were relevant to the reporting requirements. It's not just AI - they have actual tax specialists who specialize in trust taxation reviewing everything. What I found helpful was that they showed me exactly which IRS regulations applied to my situation rather than just giving a general answer. They cited specific provisions about grantor trusts and information reporting that my regular accountant hadn't mentioned. Their expertise in trust taxation specifically was what made the difference in my case.

Wait, how does this even work? You're saying someone else calls the IRS for you? How do they answer security questions about your tax info?

This sounds like a scam honestly. Why would I trust some random company to contact the IRS about my personal tax matters? The IRS would never talk to a third party about your specific situation without proper authorization.

They don't answer security questions for you. The service just handles the waiting on hold part, which was over 2 hours in my case. When an IRS agent finally answers, you get a call and are connected directly to the agent. At that point, you're the one talking to the IRS, answering the security questions yourself, and discussing your situation. It's not a third party discussing your tax situation at all. They're just solving the "impossible to get through" problem. When I called on my own, I kept getting disconnected after waiting 45+ minutes. This service just handles the hold time, then connects you directly once there's an actual human on the line. All the tax discussion is between you and the IRS agent - Claimyr is just getting you past the hold time obstacle.

Thanks for mentioning Revenue Ruling 84-52! That's exactly the type of specific guidance I was looking for. But I'm still a bit confused how to apply this. In this case, the trust holds various investments that generate income, and the daughter is actively managing those investments (buying/selling, rebalancing, etc.). Would that qualify as business activities even if the trust itself isn't operating a business?

The investment activities you're describing (buying/selling securities, rebalancing portfolios) generally don't constitute a "trade or business" for a trust. These are considered passive investment activities, even if they're actively managed. For a trust to be engaged in a trade or business, it would typically need to be operating an actual business enterprise - like if the trust owned and operated a retail store, rental properties, or provided services to customers. Simply managing investments, even actively, doesn't rise to the level of trade or business for 1099-NEC requirements.

What about the recipient though? If they get a 1099-NEC doesn't that mean they have to file a Schedule C and pay self-employment tax? That seems like it could create a tax disadvantage for the person receiving the management fee if they wouldn't otherwise have to pay SE tax.

That's a valid concern. Receiving a 1099-NEC does generally imply the income is subject to self-employment tax, which is currently 15.3% (combined employer and employee portions of Social Security and Medicare taxes). If the recipient is regularly engaged in providing investment management services, they would likely be subject to self-employment tax regardless. However, if this is a one-off family arrangement, there might be an argument that this isn't self-employment income. The recipient should consult with their own tax advisor about how to properly report this income. In some cases, they might report it as "other income" on Schedule 1 rather than on Schedule C if they can substantiate that they're not in the trade or business of providing these services to others.

Actually, there's a specific exception for trustee fees paid to family members. They're generally treated as "other income" not subject to SE tax. See Goodwin v. United States and Rev. Rul. 58-5.

@Kingston Bellamy That s'a really important distinction! I wasn t'aware of the Goodwin case or Rev. Rul. 58-5. So if the daughter is essentially acting as a trustee or in a trustee-like capacity for the grantor trust, those fees might avoid self-employment tax entirely even if a 1099-NEC is issued? This seems like it could be the best of both worlds - issue the 1099-NEC for proper information reporting avoiding (penalties but) the recipient can still report it as other "income rather" than Schedule C income. Do you know if there are specific criteria that need to be met for this trustee fee exception to apply?

The trustee fee exception applies when the services performed are essentially trustee duties - things like investment management, asset protection, and fiduciary oversight. The key factors courts look at include: 1) Whether the person has discretionary authority over trust assets, 2) Whether they're performing ongoing fiduciary duties rather than one-time services, and 3) Whether the compensation is reasonable for trustee-type services. In Rev. Rul. 58-5, the IRS specifically stated that trustee fees are not subject to self-employment tax because trustees are not engaged in a "trade or business" - they're performing fiduciary duties. This applies even to family members serving as trustees. So if the daughter in this case is essentially acting as a trustee or investment manager with ongoing fiduciary responsibilities (rather than just providing occasional investment advice), the trustee fee exception would likely apply. She could report the 1099-NEC income as "other income" on Schedule 1 instead of Schedule C, avoiding the SE tax burden.