If a Trust exists solely to pay medical expenses of it's beneficiary and nothing else. Are those payments Disbursements (non-Taxable) Distributions (taxable)?

Forum|Forum|1 year ago
August 20, 2024
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The Trust can pay either income or principal in order to cover the specific, documented medical expenses it's sole beneficiary and not for anything else. So are those payments, which are not for the beneficiary's indiscriminate use taxable to them?

TurboTax Online

M-MTax

So are those payments, which are not for the beneficiary's indiscriminate use taxable to them?

Yes, the distributions are taxable to the bene to the extent they come from taxable income such as interest, dividends, capital gains, and the like........unless the trust pays any tax due. The bene can of course deduct medical expenses on the bene's own income tax return.

Opus 17

Employee

Any income (from investments, etc.) is taxable like all income is taxable. The trust pays the income tax on the interest (form 1041, different version of turbotax, trust needs its own separate tax ID number). Possibly the trust can pass the income through to the beneficiary, who would pay the tax.

To the best of my knowledge, the beneficiary can't list medical expenses as itemized deductions on their schedule A except to the extent they paid tax on interest. In other words, if the trust pays $10,000 of medical expenses, and the beneficiary paid no tax (because the trust filed a tax return and paid the tax), the beneficiary can't deduct any expenses on the beneficiary's tax return. If the trust paid $10,000 of expenses, of which $500 was interest and the beneficiary paid income tax on the interest, the beneficiary can list $500 of deductible medical expenses (which will likely result in no or only a very small tax benefit due to the other rules on itemized deductions.)

Someone has to pay tax every year no matter what. If the trust earns $1000 of interest and dividends in 2024, that interest is taxable to someone in 2024, even if it stays in the trust for future expenses. And if the trust has (for example) $100,000 of assets, and earns $5000 of interest, and pays $5000 of medical expenses, it doesn't matter if the trust considers the expense to have been paid from interest, principle or both, the $5000 of interest is taxable income to the trust in the year it was earned, even if it wasn't paid out.

You may want to consult with a tax professional.

M-MTax

To the best of my knowledge, the beneficiary can't list medical expenses as itemized deductions on their schedule A except to the extent they paid tax on interest.

You're misinformed. Whether it comes from taxable interest..... or any other type of taxable income......... or from corpus it becomes the beneficiary's money and a medical expense would be potentially deductible for the beneficiary.

NCPERSON1

@M-MTax @Opus 17 - can we go back with a cleaner example?

Trust generates $10,000 of income; beneficiary of the trust has $10,000 of medical expenses (and for simplicity not reimbursed by insurance).

Under the typical "HEMS" standard imbedded in the trust document, the beneficiary requests that trust reimburse the beneficiary for the medical expenses (the "H" for health in HEMS).

The trust has income of $10,000 but has a distributable net income deduction of $10,000 so it has no taxable income.

The beneficiary receives a K-1 for $10,000 of income (what was distributed), so the beneficiary is paying any tax due on the trust's income.

as the beneficiary paid the medical expenses, to the extent the beneficiary can itemize, this $10,000 (subject to the 7.5% medical exclusion on Sch A.), the $10,000 can be listed on Sch A. It has nothing to do with the trust payment to the beneficiary.

comments? thoughts?