Q: I am the trustee of a Medicaid Asset Protection Trust that my mom created. Do I need to file separate tax returns for the trust?
A: No, as long as it is a grantor trust, a separate tax return is not required. That being said, income generated by the trust does have to be reported.
A Medicaid Asset Protection Trust (“MAPT”) is a type of irrevocable trust. The purpose is to remove assets from your name so they are not counted as an asset when applying for Medicaid eligibility to assist with the costs associated with a long term stay in a nursing facility or for a caregiver in the home. Assets that are commonly placed into a MAPT include a primary residence, rental properties, shares of a LLC or corporate entity, and non-qualified investments, to name a few.
The first consideration in determining if reporting requirements are triggered is to see if any income was generated by the trust. Gross income of $600 or more will trigger a reporting requirement. For example, if the only asset of the trust is the primary residence, no reporting will be required because no income will be generated.
If there is income over the threshold, the question becomes How to properly report. In most circumstances, the MAPT will be created as a “grantor trust.” This means that income is taxable to the grantor, or settlor, of the trust. If mom was the one that created the trust and put her assets into it, then she is the grantor and the income is taxable to her, whether she receives the income or not. The IRS has made it clear that all income can be reported on the tax return of the grantor; no additional return is required for the grantor trust. However, some accountants prefer to prepare an information-only tax return for the trust and still report the income on the grantor’s personal tax return.
A common misconception is that the trust must create a K-1 showing that income was paid out and this is filed with the individual’s return. This is incorrect. In the context of trusts, a K-1 is used to show income that is passed out to a beneficiary. Since the income in a grantor trust is taxable to the grantor, this does not apply.
Improper reporting can have big consequences. Your accountant must have a knowledge of the grantor trust rules. A misstep that leads to the trust reporting the income could result in the income being taxed in the highest tax bracket.
As we approach Tax Day, it is important to understand the estate planning you have created, especially if trusts are involved. Part of this includes a knowledge of the type of trust that was created and how to properly report any income. Your attorney and tax preparer should inform each other in this regard and be on the same page to make your filings complete and timely.
Britt Burner, Esq. is a Partner at Burner Prudenti Law, P.C. focusing her practice areas on Estate Planning and Elder Law. Burner Prudenti Law, P.C. serves clients from New York City to the east end of Long Island with offices located in East Setauket, Westhampton Beach, Manhattan and East Hampton.