If you’re considering an irrevocable trust, knowing what is permissible can help you make the right decision for you and your heirs. An irrevocable trust provides a few protections that a living trust doesn’t offer, making it an appealing option under certain circ*mstances. However, once you establish the trust, you can’t amend, modify or dissolve it without court approval or all your beneficiaries signing off, and you may need both.
The added protections limit what you can do, so what expenses can be paid from an irrevocable trust? The trust is obligated to pay certain expenses, such as taxes. Other payments are permissible under particular circ*mstances, and the trust terms determine what else the trust can pay for.
What Expenses Can Be Paid From an Irrevocable Trust for the Beneficiaries?
Your primary concern when setting up an irrevocable trust is likely what the trust can do for beneficiaries. Like a revocable trust, the terms you establish in the document determine how the trust dispenses assets to beneficiaries. Additionally, some types of trusts are set up for specific purposes, which provides guidelines for what the trust pays for and when.
You determine when you want your beneficiaries to receive assets from the trust. You might set an age limit or a life event. You can also decide whether the beneficiaries receive their inheritance all at once or in installments. You can use an irrevocable trust to pay beneficiary expenses, such as:
- Education: You can create a trust for the sole purpose of paying your heirs’ education expenses or include education as one of the approved distributions.
- Medical and health: As with education expenses, you can establish a trust to specifically cover medical and health costs or include them among other beneficiary distributions.
- Housing: Whether paying for rent or a mortgage, housing expenses can be included in an irrevocable trust, as well as utilities and maintenance costs.
- Living: You can set up an irrevocable trust to pay for your beneficiaries’ living expenses, including food, transportation and clothing.
AmeriEstate can help you create terms clearly defining what you wish the trust to pay for. Trust distributions can have tax implications for your heirs, so understanding federal and state limitations is essential. However, the federal tax code provides some gift tax exclusions, such as the 2503(e) exclusion for education expense distributions.
Medicaid Asset Protection Trust
A MAPT is an irrevocable trust that protects the beneficiary’s assets from Medicaid estate recovery if the individual requires hospitalization, home health care, medications or long-term care in a nursing facility. If you are over 55 and enrolled in Medicaid, assets in a MAPT generally cannot be used to pay for any of the above expenses.
You can still use the trust to cover some expenses, such as clothing and food. However, you can’t pay for these from the principal assets in the trust. You can only use the trust's income, such as profits from stock investments. If you spend into the principal, all assets in the trust are at risk. Before you create a MAPT, make sure you meet your state’s Medicaid look-back period requirements.
Special Needs Trust
If you have a child with special needs who qualifies for government assistance, such as Medicaid and Supplemental Security Income, based on their disability, an SNT ensures your child’s finances don’t exceed the thresholds for these programs. With this irrevocable trust type, your child can receive government benefits and still meet additional needs through the trust.
However, you should set up the trust to ensure any distributions don’t result in disqualification. An AmeriEstate attorney can help you assess how to provide for your child’s current and future needs without jeopardizing public assistance.
What Non-Beneficiary Expenses Can Be Paid From an Irrevocable Trust?
In addition to beneficiary expenses, an irrevocable trust can — and often must — pay for other expenditures related to the trust, the assets in the trust and trust administration.
Taxes
The Internal Revenue Service treats an irrevocable trust as its own tax-paying entity. The trustee is responsible for ensuring the completion and filing of the trust’s taxes. Like any tax return, the trust may have income and deductions for expenses, including advisory fees, legal fees and administrative costs. Any taxes owed come from the trust’s assets. If any distributions are made to beneficiaries from the trust’s income, heirs are generally responsible for paying income taxes on those unless the trust paid them before the allocation occurred.
Administrative Expenses
An irrevocable trust can cover the cost of managing and dispensing trust assets. The trust will pay for the trustee’s services and other required professional services, including legal fees, tax preparation and accounting. When the trust holds investments, it can pay for an advisor’s or broker’s fees and any other expenses related to managing the portfolio. When real estate is involved, an irrevocable trust will cover costs associated with the property, such as maintenance, insurance and property taxes.
Debts
After you pass, the trustee must notify creditors of your death and allow time for them to submit a claim against the trust. The trustee can pay any debts you owe that your estate can’t cover. Additionally, if you place assets in the irrevocable trust with debts attached, such as a house that still carries a mortgage, those debts can be paid from the irrevocable trust.
Charitable Donations
You can set up your trust to allow for charitable donations. Including charitable donations provides tax benefits in the same way it does for your personal income taxes. When creating your trust terms, you must decide which charities you want the trust to donate to, how much you wish the donation to be and when and how often you want it to occur. Establishing charitable donations in the trust terms allows the trustee to cover those expenses from the trust.
How Can You Ensure Expenses Get Paid From an Irrevocable Trust?
There are two ways to ensure expenses get paid from an irrevocable trust. The first is to create a trust document with clear and detailed terms. The second is responsible trust administration. AmeriEstate can help with both. Our attorneys can work with you to set up an irrevocable trust and offer your family and the trustee administration assistance. Contact us today to learn more about our trust creation and administration services.
Sources:
https://www.thehivelaw.com/blog/what-expenses-can-be-paid-from-an-irrevocable-trust/
https://www.cbo.gov/publication/57272
https://www.medicaid.gov/medicaid/eligibility/estate-recovery/index.html
https://www.medicaid.gov/medicaid/eligibility/estate-recovery/index.html
https://www.ccrjlaw.com/blog/2023/05/do-beneficiaries-pay-taxes-on-trust-distributions/
