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Tax Questions Answered: Do I Need to File a Tax Return for my Trust?

Question: I created an Irrevocable Medicaid Asset Protection Trust. Do I need to file a tax return for the trust?

Answer: Appropriately named, a Medicaid Asset Protection Trust (“MAPT”) is a trust created to shield assets from Medicaid in order to preserve them for your family and generations to come. If properly drafted and funded, assets transferred to your MAPT are not considered “countable” for Medicaid purposes.

A MAPT is an irrevocable trust, which means that when you fund the trust with your assets, you are actually transferring ownership of those assets to the trust. This is exactly why Medicaid does not consider the assets to be “countable” assets.

But, what does this mean for purposes of filing a tax return?

In general, most irrevocable trusts must file an IRS Form 1041 (U.S. Income Tax Return for Estates and Trusts) and a New York State Form IT-205 (New York State Fiduciary Income Tax Return). These income tax returns are filed on an annual basis and reflect the income generating activity of the trust; just like your individual tax return (often Form 1040).

However, some irrevocable trusts are considered to be grantor trusts for federal and state income tax purposes. For a grantor trust, filing a Form 1041 and Form IT-205 is optional. A grantor trust is a type of trust where the grantor (or the creator) has retained certain powers with regard to the trust and/or the assets in the trust, such that the IRS will “look through” the trust and consider the grantor to be the owner of the trust assets for tax purposes. But don’t worry, the tax rules and the Medicaid rules are different. So even though the IRS/NYS tax authority may view the grantor to be the owner for income tax purposes, Medicaid will not.

When a grantor is treated as the owner of any portion of the trust, the income generated and the accompanying deductions and credits “flow-through” and are included in computing the grantor’s individual tax liability. As a result, if applying the grantor trust rules result in the grantor owning all of the assets in the trust for income tax purposes, then the grantor will take into account all items of income, deduction and credit when computing and preparing their own tax return.

In this instance, it is general practice to have your tax return preparer file an informational return for the trust, which includes only the trust’s name, address and identification number (i.e. the grantor’s social security number) to put the tax authorities on notice that this is a grantor trust.

If you have prepared and funded a MAPT, speak with your attorney and confirm whether the trust is considered a grantor trust for income tax purposes.


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