The Listen to Lawrence Letter: More trust questions…

July 1, 2024
June 25, 2024 • Volume 5 Issue 255
More trust questions…


First question:

I have an irrevocable Medicaid trust with you funded with stocks. My kids are the trustees. While the stocks are owned by the trust, the stock account is linked to my Social Security number.  If the trust sells the stock, is there any way for the trust to pay the capital gains instead of me?


The way we set up these trusts is to create what is called a “grantor trust.” A grantor trust is one where we purposefully draft it with you retaining so much control that the IRS ignores the trust for income tax purposes only. The result is that you are responsible for the tax because the IRS treats you as the owner of all the assets in the trust. This is why we often use your Social Security number on the accounts. We do this because we want you to be able to retain your $250,000 capital gain exclusion on the sale of your principal residence, and overall so that trust income is taxed in your tax bracket, which is usually less than the tax bracket of the trust (unless your income is in excess of $500,000 and change).


As such, the trust should NEVER pay the tax, because the trust cannot pay your bills. Note that, with your consent, the trustee can take money out of the trust and give it as a gift to one or more of your children. In turn, your children can use that money to finance their trip to Europe this summer or help mom with her bills. It is their money at that point and they can do with it as they see fit.

Second question:

Can my kids withdraw $15K from the trust if I want them to? I’m not sure how they go about doing this.


See my answer to the first question.

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