The grantor (as an individual or couple) transfers their assets to an irrevocable trust. However, unlike other irrevocable trusts, the grantor can be the income beneficiary. The grantor can receive income from the trust to the maximum amount allowed by Medicaid.
What is irrevocable trust income?
An irrevocable income-only trust is a type of living trust often used for Medicaid planning. It protects assets from being sold to pay for nursing home and other long-term care expenses so that the assets can be passed on to beneficiaries.
Who is the beneficiary of an irrevocable trust?
An irrevocable trust beneficiary enjoys the tax-free use of trust assets. The IRS defines a grantor trust as a trust established to benefit the grantor or to give him control of the trust’s assets or income. The agency defines a beneficiary as one who is entitled to the trust’s benefits.
How is income from a grantor trust taxed?
During the lifetime of the grantor, any interest, dividends, or realized gains on the assets of the trust are taxable on the grantor’s 1040 individual income tax return. After the grantor’s death, the trust assets are considered part of the decedent’s estate and therefore receive a full step-up in basis for capital gains tax purposes.
Are there any exceptions to grantor trust rules?
The IRS defines eight exceptions to avoid triggering the grantor trust status. For example, if the trust has only a single beneficiary who is paid the principal and income from the trust. Or, if the trust has multiple beneficiaries who receive the principal and income from the trust in accordance with their share holding in the trust.
Can a grantor revoke a revocable trust?
With a revocable trust, on the other hand, the grantor may revoke it or change the terms at any time. The trust still protects its property from the estate tax and creditors, but the grantor herself pays income tax on trust income because she can still choose to access its property.
