Note: numbers are approximate off the top of my head...
My mother in-law was accepted by Florida medicaid in October. She is currently in a nursing home. Her income of $2100 goes into a trust fund since she makes more than the $1900 allowed by Florida Medicaid. All but $35 of this monthly amount is paid from the trust fund to the nursing home. Does my father in-law still claim her income on their taxes?
For most of last year she was in assisted living. Can he claim any of these costs as a deduction?
To elaborate for the archives: I believe your wife has what is called, under federal law, a "Miller Trust" (a.k.a. "Qualified Income Trust") for those individuals who have a monthly income exceeding Medicaid eligibility but insufficient to pay the cost of a nursing home, where "cost" is computed by using a nursing home average. The individual's monthly income in excess of the Medicaid eligibility accumulates in the Miller Trust until the individual dies. Then the Miller Trust's contents goes to the state up to the amount the state Medicaid program spent on the individual less what was already paid.
I am encountering some of these issues for a relative who went on nursing home Medicaid this past year. I am a layperson otherwise.
trusts) as an entity distinct from the beneficiary (the mother-in-law in this case). The trust has income and it has distributions which must meet federal and state requirements. Federal tax form 1041 needs to be completed for the trust. See the instructions for F1041 at
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. I think for purposes ofF1041, this trust is technically termed a "complex trust." Thedistributions made to your wife are deducted from the trust's incomeusing F1041 Schedule B, line 18. I expect the tax on the trust will betiny or zero.
As part of the annual tax procedures for the trust, its trustee (or appointed tax fiduciary) must prepare and issue a Schedule K-1 to its beneficiary(ies). The Schedule K-1 is supposed to break down the distribution to the beneficiary by income type, so the income may be appropriately allocated on the beneficiary's Form 1040. Hence my understanding is your father-in-law will duly report his wife's income from the trust on F1040. Then on Schedule A, he may deduct all nursing home expenses related to medical care. To be clear, this may include lodging and meals, everything, as long as the main reason for being at the nursing home is to get medical care. In short the entire $1900/ month x the number of months etc. should be reflected on Schedule A under medical expenses. See
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"Tax Guide for Seniors"). There are some spousal issues here that I will hope were already considered when this Miller trust was set up. Review this short article to see that your father-in-law is getting that share of his wife's income to which he is entitled while she has a Miller trust, or whether he should consult a local expert on same:
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. Assisted living costs will tend to be deductible also on Schedule A under medical expenses. Here is an introduction:
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IRS Pub. 502 for details:
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Your questions are important. We are an aging population with, lately, particularly depleted resources yet rising medical costs. So the burden on Medicaid and the demand to understand how to deal with tax situations such as this are also on the rise. If you learn more, I would be interested in reading it.
Reading pages 11 and 15 of the 2008 instructions for Form 1041 and other sources, it is not clear to me whether a Miller trust is always a "grantor trust." If it is a grantor trust, then the trust is not treated separately for income tax purposes. Instead the trust income and expenses are reported on the individual's return, or in this case the MFJ form 1040. It seems an F1041 is still required, but not a Schedule K-1. See specifics in the 1041 instructions.
Sometimes the trust documents explicitly state whether it is a grantor trust; they are worth reviewing.
Grantor trusts are defined under §§671-679 of the Internal Revenue Code. I'm not familiar with Miller trusts. But it appears that they are set up with the intent that money in the trust will be used for the benefit of the grantor who set up the trust in the first place.
If that's accurate, then under §673, that appears to me that would necessarily be a grantor trust.
Generally a trust will say whether it is revocable or irrevocable, but not whether or not they are grantor trusts. Revocable trusts are always grantor trusts. Irrevocable trusts may or may not be depending on their terms.
I read these earlier. Unfortunately I could not make out much from them.
The reason I am not sure is because the Miller trust disallows use of any income over the stipulated Medicaid amount. The excess of the grantor's income that otherwise would go to her/him must stay in the trust until the beneficiary dies. Upon death, and under federal Medicaid law, whatever is in the trust goes to the state, up to the medical expenses that have been incurred.
I see two states (Kentucky and Tennessee, using the term "QIT" or "Qualified Income Trust," one of a few synonmous terms for "Miller Trust") that say at a few web sites that in their states, these trusts are grantor trusts. But there seems to be little on this for other states.
Well the above helps. From my reading, all Miller trusts are irrevocable. Otherwise I cannot tell whether the status (grantor or non-grantor) of these trusts is up to each state.
Whether a Miller trust is a grantor trust or a non-grantor trust and some of the form 1041 implications were discussed once before here in
1998:
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One authority is cited (the National Association of Tax Professionals) as saying Miller trusts are non-grantor trusts. The grounds seem to be that all the income goes to someone other than the grantor (namely, Medicaid/the nursing home). However, what the states of Kentucky and Tennessee say today conflicts with this. I can see both sides.
Maybe most importantly, I would expect the difference in federal taxes to be small-to-none regardless of which way is used in this case. Hence the IRS's feathers could not get too ruffled, either money-wise or audit-wise. I do not know if doing the taxes one way reduces the chances of an audit in general.
Aside: Congress codified, and so legally sanctioned, Miller trusts in
1993 as a way to help a certain category of folks seen to be trapped by Medicaid law then. Namely, those folks who had too much monthly income to qualify for nursing home Medicaid then but not enough monthly income to pay the typical cost of a nursing home each month. (Assets are a different matter.) Miller Trusts are no scam or exercise in loopholes but instead a device Congress has approved to help the elderly on the verge of poverty.
If it can be used for the grantor's benefit and use is not under someone else's complete discretion, it's for his benefit, and as a result should be considered a grantor trust. It's not a gift to another person.
I suppose if you argue that it's not a grantor trust, the trust itself would pay its own income taxes. But bracket creep for trusts is pretty steep, so, as you say, there might not be much of a savings either way.
"Stuart A. Bronstein" wrote: Re Qualified Income Trusts (formerly known as Miller Trusts):
I hear you. The ambiguity to me is that every cent of the contents of a Qualified Income Trust (or QIT, the modern term for Miller trust) is designated by law to go to the state. So the grantor or the trustee has no discretion, from what I can tell. On the third hand, maybe that's wording and definition leger-de-main on the part of an amateur (me).
The law surely must say something conclusive on this. I am not 100% sure which type of trust it is and do not want to post mis- information. Not that you are, and hopefully the OP finds something dispositive on this.
I saw one nasty Florida dotcom web site (trying to sell legal assistance) stating that Medicaid often audits QITs every 3-6 months. Mess up the QIT documents, and a person must pay the full nursing home costs--and back costs--until the QIT is corrected, the site says.
I agree it is entirely for the benefit of the grantor, and it is certainly not a gift; rather it is payment for services.
One thing that bothers me: Treating the QIT as a grantor trust means that the tax bill is paid by the grantor (or for MFJ, jointly by husband and wife). But from where does the grantor get this money? I guess some resource other than the trust. This is a little ironic and kind of argues for the QIT being a non-grantor trust, so the taxes may be paid from the trust.
ISTM the maximum monthly amount accumulating in any Miller trust is going to be roughly the difference between the local average of the monthly cost of a nursing home and the Medicaid monthly income qualifying limit. So I think we are talking about a QIT Trust having a maximum net income each month on the order of $1k-$2k. So figure at most around $24k net income to the QIT. From this taxes are easily paid.
I haven't read the legislation. But according to one fact sheet, the trust must "Require that the State will receive all funds remaining in the trust at the time of your death (up to the amount of Medicaid benefits paid on your behalf)."
If the remaining funds can be paid back to the estate, that is a "reversion" which the code defines as one type of trust defined as a grantor trust. In addition the entire fund is for the benefit of the trustor, paying his care and then the balance going back to his estate.
Normally when you create a trust and you have a personal interest in it, it is a grantor trust.
The law is not absolutely crystal clear. But I have what I consider a very informed opinion on the matter, as you have noticed.
I agree, that could be a bit of a problem. But this is a trust for people who have too much to qualify for Medicaid, so perhaps it would be thought that they had enough to pay the tax on income earned by the trust.
Good point; I think I am sold. (Everything I have seen says what you wrote above about the reversion. Though it seems unlikely that anything would be left after paying the residual, so to speak, Medicaid bill.)
[snip; no dispute about your opinion being informed or any of the rest]
I agree. Plus I do see that Form 1041's tax rates for trusts really are steep, even if we are only talking in the neighborhood of a few thousand dollars to $20k of net income each year. Thus if a QIT is a grantor trust, then I think the feds will tend to get less tax dollars than if it is a non-grantor trust. Also, the trust retains more for eventual turnover to the state Medicaid program (after the grantor dies).
I think I would like to see what the NATP says today on the subject, since in that 1998 MTM thread there is that mentionof the NATP saying different. Otherwise I think your arguments hold water and so a QIT is a grantor trust. The OP's Father-in-Law's obligation is to complete a
1041 but not an accompanying Schedule K-1, then show all the income to the trust on the MFJ 1040 as if there were no trust, then take deductions under medical expenses on Form 1040, Schedule A for nursing home costs. All of which could stand double-checking with a bona fide authority AFAIC until the tax becomes a part of routine eldercare parlance. (Or maybe it is just obvious to most people with a glancing acquaintance with trusts that the QIT is a grantor trust?)
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