Can Benficiary pay tax on a Grantors Trust

Forum|Forum|2 years ago
May 26, 2024
2 replies
24 views

Clients established two irrevocable residence grantors trusts years ago; Mom's trust was funded with one property (a summer house). Dad's Trust with a 2 family 50% owner occ. 50% rental they still live in.

Daughter is sole trustee and beneficiary.

Mom's house was sold and proceeds deposited in brokerage account titled to trust. Parents still occupy and rent the 2 family. Parents report and pay taxes on the income via grantor letter

For reasons of Medicaid look back, trustee or her atty, says the parents should not be paying the tax on the trust money. I'm okay with paying tax at the trust level but daughter would like a k1 as beneficiary to pay the tax at her on her return. Distributions have not been made from the trust account..

My understanding is that grantors are responsible for the tax.... What say you o wise ones?

Best answer by BobKamman

"was told tax can be reported and paid at the trust level. Any truth to that?"

True, if there were no distributions to the grantor. False, otherwise.

There is something called a "sprinkling trust, where the trustee is allowed to disperse funds according to the needs of the beneficiaries. Unlike many trusts where the trustee must follow strict instructions from the creator of the trust, sprinkling trusts allow almost unlimited flexibility for the trustee to give funds to the beneficiaries as needed." But I doubt that's what you have.

BobKamman

Level 15

Exactly who is sending the parents a "grantor letter" ?

If others want to use this forum as a place to discuss how to beat the Medicaid system's rules, it may be interesting to watch. The answer to your tax question is, it depends on the trust document. Apparently, someone determined long ago that this is a grantor trust. If that hasn't changed, the treatment of its income can't be changed.

IRonMaN

Level 15

A new attorney said oops on the setup?

Slava Ukraini!

Skylane

Author

Intuit Community Champion

The trusts were established about 12 years ago. Yes, grantors trust; I have copy of trust document and confirmed with the attorney when the trust was created. The tax has always been reported and paid on grantors 1040.

I won't issue k1 in favor of the beneficiary but was told tax can be reported and paid at the trust level. Any truth to that?

If at first you don’t succeed…..find a workaround

T

Taxtime3

Level 5

If it is a Grantor trust, the income will pass out on a grantor tax letter (if a 1041 is done, and the grantor trust has its own EIN). This happens most of the time when the grantor becomes incapacitated and a successor trustee takes over. Typically it is reported under the grantors SSN. If its a simple irrevocable trust, the income will still pass pass out (even if they don't get a distribution). A complex trust (complex $100), you can keep the income in the the trust and pay it at the trust level. You can just leave the DNI in the trust (no distributions, no income will pass out). A complex $300 income is typically required to be passed out. Not sure if that helps you or not.

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