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Medical Paid by a Trust

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Level 3

I am working on a Trust tax return.  The Trust paid significant medical expenses for the beneficiary's wife (let's say $ 30,000).  Now if the capital gain from stock sales ($ 15,000) was used towards it that would be considered a distribution.  So if the DNI deduction is $ 15,000 what amount  can the beneficiary claim  on 1040 Sch A?   Only the amount used in the DNI?

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Level 12

It seems like you keep confusing Trust Funding Source with Income, and Income with Medical payouts. At least, that's how I read this newest comment: "if the trust paid more medical expenses than the $ 10,000"

Starting with your first description, you need to separate the Income/Capital Gains issue and the Medical issue. You linked them, as if the one makes the other by definition.

Go back and read @BobKamman contribution, specifically starting at: "The funds are considered to have come first from trust income (not capital gains) and then from trust principal (which includes the capital gains, after taxes). " And that's why Bob's next paragraph points out the determination for Medical is not part of "is this capital gains, was that income."

It simply means the Trust made some funds available to that beneficiary, indirectly.

Step 1. What types of activities did the Trust have this year? This has nothing to do with what happens with any Funds, or even if nothing happens, or there are no activities at all.

Step 2. Did any beneficiary benefit, directly or indirectly? That gets treated for tax purposes however it gets treated, not for what was done with it, but for what it was (DNI, corpus).

Step 3. The Medical expense your tax payer individual can "take" is whatever was incurred and spent, as it qualifies per the 1040, no matter where they got the funds from.

For example, the trust could include a payout to the beneficiary at some attained age, just reached, and that person had this medical debt hanging over them, so the payment went from the Trust to the Hospital. That could result in the Trust paying medical costs far exceeding DNI for that same year. That's why they don't relate. Heck, it could even be some settlement trust set up specifically for the future medical needs of an injured party, as quite the pool of funds available.

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12 Replies 12
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Level 15

30,000 was a distribution from the trust to or for the beneficiary. 30,000 is eligible for the medical expense deduction.

In general, capital gains are taxed to the trust. There is an income distribution calculation on page 2 of the 1041.

You're mixing apples and oranges.

 


ex-AllStar
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Level 11

@j-kanabis  "Now if the capital gain from stock sales ($ 15,000) was used towards it that would be considered a distribution. "

If $30,000 was distributed for the benefit of a beneficiary, that is the maximum DNI that would show on the Schedule K-1.  But whether the trust pays tax on the capital gain, or it flows through to the beneficiary, is determined by the trust document, or in the absence of such a provision, by state law.  Usually, capital gains are taxed to the trust, even if funds were distributed to a beneficiary.  The funds are considered to have come first from trust income (not capital gains) and then from trust principal (which includes the capital gains, after taxes).   

The $30,000 received by the beneficiary is a deductible medical expense, if all other requirements are met.  It doesn't matter whether all of it, some of it or none of it is shown as income on the K-1. 

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Level 3

Thank you.

In researching this before I asked the community I found only the following example:

Payments on behalf of beneficiary:  A trust pays medical expenses of $ 6,000 directly to medical service providers. The Trust has  $ 10,000 income (interest and dividends). The Schedule K-1 reflects a $ 6,000 income distribution to beneficiary.

Note that such medical expenses would also be an itemized deduction on the beneficiary's individual income tax return.  Note of this should be included on Schedule K-1 Line 14H.

(Of course it is not mentioned or exampled if the beneficiary can take more medical expenses on 1040 Sch A if the trust  paid more medical expenses than the  $ 10,000)

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Level 12

It seems like you keep confusing Trust Funding Source with Income, and Income with Medical payouts. At least, that's how I read this newest comment: "if the trust paid more medical expenses than the $ 10,000"

Starting with your first description, you need to separate the Income/Capital Gains issue and the Medical issue. You linked them, as if the one makes the other by definition.

Go back and read @BobKamman contribution, specifically starting at: "The funds are considered to have come first from trust income (not capital gains) and then from trust principal (which includes the capital gains, after taxes). " And that's why Bob's next paragraph points out the determination for Medical is not part of "is this capital gains, was that income."

It simply means the Trust made some funds available to that beneficiary, indirectly.

Step 1. What types of activities did the Trust have this year? This has nothing to do with what happens with any Funds, or even if nothing happens, or there are no activities at all.

Step 2. Did any beneficiary benefit, directly or indirectly? That gets treated for tax purposes however it gets treated, not for what was done with it, but for what it was (DNI, corpus).

Step 3. The Medical expense your tax payer individual can "take" is whatever was incurred and spent, as it qualifies per the 1040, no matter where they got the funds from.

For example, the trust could include a payout to the beneficiary at some attained age, just reached, and that person had this medical debt hanging over them, so the payment went from the Trust to the Hospital. That could result in the Trust paying medical costs far exceeding DNI for that same year. That's why they don't relate. Heck, it could even be some settlement trust set up specifically for the future medical needs of an injured party, as quite the pool of funds available.

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Level 3

Thank you very much for your response. No I did not mean to confuse the issue.   I earlier found a site where the medical paid by the trust could NOT be taken by beneficiary on 1040 Sch A.  I did NOT think that was correct.  But then I came across the  example regarding the $ 10,000 income and $ 6,000 medical  which made me think that maybe only the beneficiary could take the medical if it was included as DNI (since the beneficiary would be picking up income).

Now as far as the original issue: The Trust has interest, dividend, and capital gain  income and expenses.  The Trust does pay tax on the capital gain. The DNI in this case is -0-; so the beneficiary K-1 has no income to report. 

Now if the investments sold resulting in the capital gain was specifically sold for the beneficiary medical expense (and it is listed in the document although in this case the document is not to be found) then the Trust tax would be -0-; the beneficiary would pick up income but has Sch A expenses to offset.  The additional capital gain income would affect the state return.

Is that possible or am I confusing or not completely understanding the issue?

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Level 12

You are still relating things that do not relate. You are mixing the perspectives.

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Level 3

How so?  (And I do not mean to sound like a wise guy; just trying to save the Trust taxes).

Capital Gains and DNI: Capital Gains are normally taxed to the estate or trust because they are  usually not included in DNI unless they are paid, credited, or required to be distributed to any beneficiary during the taxable year (including charitable beneficiaries).  If the instrument is silent with regard to capital gains, capital gains are allocated to corpus (exclude from DNI); Correct?

Capital gains allocated to corpus are included in DNI if they are either paid,credited, or required to be distributed to a beneficiary during the year, or paid, permanently set aside, or to be used for a charitable purpose; correct?

In certain situations it is easily ascertained whether capital gains are paid to a beneficiary. For example, if the trust instrument provides that the proceeds from the sale of a certain asset are to be paid to a beneficiary upon sale, then any capital gain recognized upon the sale of that asset is paid to the beneficiary and is includable in DNI.   Correct?

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Level 12

What you keep doing wrong is associating the payment as if it relates to anything other than:

It's a distribution.

That's all you have. An indirect distribution.

Then, the Beneficiary notices, "Hey! They spent what would have been considered Mine; and, by spending it for me, on something that would have been mine to pay, I get to treat it the same as if I paid it, which happens to be something that for my personal tax filing might show as a deductible itemization for Medical expense."

So, you have two Separate activities: Whether or not there was a Distribution. And whether or not there is something a person can include in their taxes.

Because your beneficiary had Two Events this year.

The Trust had one. That's where you keep stating this scenario incorrectly.

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Level 3

I really appreciate the feedback .   I know it is a distribution.  I never said it wasn't. My original discussion was about whether the beneficiary could deduct all, part or none of  it on his 1040 Sch A.  Your response, correct me if I am wrong, on Sunday  (3) was that he could; correct?

How could the beneficiary just realize this distribution when  he needed to go to the Trustee for it since it was a significant amount?

Now was my replied statements yesterday incorrect?  They are from an IRS Seminar.

 

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Level 12

Sorry; I don't have anything more to add. Bob's reply laid it out very well.

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Level 11

@j-kanabis  " I earlier found a site where the medical paid by the trust could NOT be taken by beneficiary on 1040 Sch A.  "

Probably a good idea not to provide a link to it, because it would show how foolish some people are about believing anything they see online.  

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Level 3

Absolutely.

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