What is considered Trust Income and does it matter?

July 28, 2022
Dear Clients and Friends:
What is considered trust income and does it matter?
The following question and my response will help with this question:
I have an irrevocable trust created by you 4 years ago, funded with securities that produce income. The trust has a tax ID number rather than my social security number; this way the earnings income from the securities aren’t included in my personal income. If I have to go into a nursing home the earnings income will not be taken by Medicaid. If the earnings income is included in my personal income, is it correct to say that Medicaid will apply this income to pay for the nursing home expenses?
This one is a little complicated. The first thing you have to know is that WHO pays the tax on trust income has nothing to do with Medicaid’s ability to get that income. Medicaid only gets the income if the trust grantor gets the income, and this has nothing to do with whether or not the grantor pays tax on the income. It also has nothing to do with whether or not the trust is assigned a tax ID# or uses the grantor’s social security number. Did I lose you yet?
Here we go! First, read the trust and determine what it says about who should receive actual income. If the grantor can get the income, then Medicaid can get the income. If the trust income must stay in the trust or can be paid out to someone other than the grantor (or for the grantor’s benefit), then Medicaid cannot get the income. Period.
Interestingly, even when no income can be paid to or for the use of the grantor, the grantor may still be taxed on that income. The fact that they may be taxed on the income is not relevant to Medicaid, it is strictly a tax issue.
Usually, the trust pays the tax (at higher rates). If the trust pays the income to someone else, then the trust gets a deduction and pays no tax, but the recipient of the income will pay the tax. These types of trusts must receive a tax ID#.
Most often, my Medicaid trusts do not receive a tax ID# and the grantor’s social security number is used instead. This is called a GRANTOR TRUST, a trust where the grantor retained a lot of control (on purpose) over the trust income. This can be true even if the trust income cannot be paid to or for the use of the grantor. Also, understand that the trust could also be considered a grantor trust yet the tax ID# can still be used. In other words, when the trust is a grantor trust, the tax ID# or the SS# can be used.
What I am trying to teach you is that WHO pays the tax, and which number is used (tax ID# or SS#) has nothing to do with whether the income is protected from Medicaid. Medicaid can only get the income if the trust says the grantor can get the income (or if it can be used for their benefit).
Got it?
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peace, health, and happiness,
Lawrence Eric Davidow