Sally previously transferred her house into a Medicaid Asset Protection Trust, the trust sold the house for $350,000.00, and the trust purchased a new condo in Commack, New York for $200,000.00. Sally’s son, Harold, the trustee of the trust, kept the excess sale proceeds, $150,000.00, at the Bank of Smithtown earning interest. In February of 2016, the Bank of Smithtown issues a 1099-INT for the interest earned during calendar year 2015. Harold asks, “where does this interest get reported? Do I need to file a tax return for the trust” The answers are: the interest is reported on Sally’s personal income tax return and the trust does not need to file an income tax return. This is because the trust is a grantor-type trust for tax purposes.
A grantor type trust is a trust where the grantor retains certain powers or ownership benefits. Because of these powers or ownership benefits of the grantor, a grantor trust is ignored for income tax purposes and all of the income, deductions, etc., are treated as belonging directly to the grantor.
EXAMPLE: Nicole created the Nicole 2015 Irrevocable Trust. Nicole is the grantor and she named her sister Deborah from Dix Hills as the trustee. The trust was designed so that Nicole retained the ability to change the beneficiaries of the trust by using a special power of appointment. During 2015, the trust sold 100 shares of Bovie Medical Corp. stock for $1,010 in which it had a basis of $10 and 200 shares of XYZ stock for $10 in which it had a $1,020 basis.
The Nicole 2015 Irrevocable Trust does not report these transactions on Form 1041 nor does it issue a Schedule K-1 to Nicole. Nicole, individually, will report these transactions on Form 8949 (Sales and Other Dispositions of Capital Assets and Schedule D of form 1040.
EXAMPLE 2: Nathan created the Nathan 2015 Irrevocable Trust. Nathan is the grantor and he named his brother Carl from Centereach as the trustee. The trust was designed so that, although irrevocable, Nathan could change the trustee and successor beneficiaries of the trust. During 2015, the trust earned dividends from some local public Long Island companies. In March of 2016, Carl receives, from these companies, forms 1099-DIV reporting the dividend income earned throughout 2015.
The Nathan 2015 Irrevocable Trust does not report these transactions on Form 1041 nor does it issue a Schedule K-1 to Nathan. Nathan, individually, will report these transactions on Part II of Schedule B of form 1040.
To be continued ….
Aaron E. Futterman, CPA, Esq. is a partner in the law firm of Futterman & Lanza, LLP with offices in Smithtown, NY and clients throughout Suffolk, Nassau, New York City, Westchester and Rockland Counties. He concentrates his practice to Elder Law, Medicaid Planning, Medicaid Applications, Estate Planning, Probate, Estate Taxes, and Estate Administration.