Medicaid recipient and all income going to nursing home, how to show on taxes

Posted by PCBeach on March 15, 2009, 1:47 pm

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Note: numbers are approximate off the top of my head...

My mother in-law was accepted by Florida medicaid in October. She is
currently in a nursing home. Her income of $2100 goes into a trust
fund since she makes more than the $1900 allowed by Florida Medicaid.
All but $35 of this monthly amount is paid from the trust fund to the
nursing home. Does my father in-law still claim her income on their
taxes?

For most of last year she was in assisted living. Can he claim any of
these costs as a deduction?

Thanks in advance.

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Posted by honda.lioness on March 16, 2009, 2:22 pm

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> Note: numbers are approximate off the top of my head...

> My mother in-law was accepted by Florida medicaid in October. She is

> currently in a nursing home. Her income of $2100 goes into a trust

> fund since she makes more than the $1900 allowed by Florida Medicaid.

> All but $35 of this monthly amount is paid from the trust fund to the

> nursing home. Does my father in-law still claim her income on their

> taxes?

> For most of last year she was in assisted living. Can he claim any of

> these costs as a deduction?

To elaborate for the archives: I believe your wife has what is called,
under federal law, a "Miller Trust" (a.k.a. "Qualified Income Trust")
for those individuals who have a monthly income exceeding Medicaid
eligibility but insufficient to pay the cost of a nursing home, where
"cost" is computed by using a nursing home average. The individual's
monthly income in excess of the Medicaid eligibility accumulates in
the Miller Trust until the individual dies. Then the Miller Trust's
contents goes to the state up to the amount the state Medicaid program
spent on the individual less what was already paid.

I am encountering some of these issues for a relative who went on
nursing home Medicaid this past year. I am a layperson otherwise.

>From my reading, federal tax law treats this trust (along with other

trusts) as an entity distinct from the beneficiary (the mother-in-law
in this case). The trust has income and it has distributions which
must meet federal and state requirements. Federal tax form 1041 needs
to be completed for the trust. See the instructions for F1041 at
http://www.irs.gov/instructions/i1041/ . I think for purposes of
F1041, this trust is technically termed a "complex trust." The
distributions made to your wife are deducted from the trust's income
using F1041 Schedule B, line 18. I expect the tax on the trust will be
tiny or zero.

As part of the annual tax procedures for the trust, its trustee (or
appointed tax fiduciary) must prepare and issue a Schedule K-1 to its
beneficiary(ies). The Schedule K-1 is supposed to break down the
distribution to the beneficiary by income type, so the income may be
appropriately allocated on the beneficiary's Form 1040. Hence my
understanding is your father-in-law will duly report his wife's income
from the trust on F1040. Then on Schedule A, he may deduct all nursing
home expenses related to medical care. To be clear, this may include
lodging and meals, everything, as long as the main reason for being at
the nursing home is to get medical care. In short the entire $1900/
month x the number of months etc. should be reflected on Schedule A
under medical expenses. See http://www.irs.gov/pub/irs-pdf/p554.pdf
("Tax Guide for Seniors").

There are some spousal issues here that I will hope were already
considered when this Miller trust was set up. Review this short
article to see that your father-in-law is getting that share of his
wife's income to which he is entitled while she has a Miller trust, or
whether he should consult a local expert on same:
http://www.premack.com/columns/Classic/1999-03-05.htm .

Assisted living costs will tend to be deductible also on Schedule A
under medical expenses. Here is an introduction:
http://www.seniorlivingresidences.com/tax/.
See IRS Pub. 502 for details: http://www.irs.gov/pub/irs-pdf/p502.pdf

Your questions are important. We are an aging population with, lately,
particularly depleted resources yet rising medical costs. So the
burden on Medicaid and the demand to understand how to deal with tax
situations such as this are also on the rise. If you learn more, I
would be interested in reading it.

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Posted by honda.lioness on March 16, 2009, 4:49 pm

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Reading pages 11 and 15 of the 2008 instructions for Form 1041 and
other sources, it is not clear to me whether a Miller trust is always
a "grantor trust." If it is a grantor trust, then the trust is not
treated separately for income tax purposes. Instead the trust income
and expenses are reported on the individual's return, or in this case
the MFJ form 1040. It seems an F1041 is still required, but not a
Schedule K-1. See specifics in the 1041 instructions.

Sometimes the trust documents explicitly state whether it is a grantor
trust; they are worth reviewing.

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Posted by Stuart A. Bronstein on March 16, 2009, 5:07 pm

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honda.lioness@gmail.com wrote:

> Reading pages 11 and 15 of the 2008 instructions for Form 1041 and

> other sources, it is not clear to me whether a Miller trust is

> always a "grantor trust." If it is a grantor trust, then the trust

> is not treated separately for income tax purposes. Instead the

> trust income and expenses are reported on the individual's return,

> or in this case the MFJ form 1040. It seems an F1041 is still

> required, but not a Schedule K-1. See specifics in the 1041

> instructions.

Grantor trusts are defined under §§671-679 of the Internal Revenue
Code. I'm not familiar with Miller trusts. But it appears that they
are set up with the intent that money in the trust will be used for the
benefit of the grantor who set up the trust in the first place.

If that's accurate, then under §673, that appears to me that would
necessarily be a grantor trust.

> Sometimes the trust documents explicitly state whether it is a

> grantor trust; they are worth reviewing.

Generally a trust will say whether it is revocable or irrevocable, but
not whether or not they are grantor trusts. Revocable trusts are
always grantor trusts. Irrevocable trusts may or may not be depending
on their terms.

Stu

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Posted by honda.lioness on March 16, 2009, 11:39 pm

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wrote:

> honda.lion...@gmail.com wrote:

> >it is not clear to me whether a Miller trust is

> > always a "grantor trust."

snip for brevity

> Grantor trusts are defined under §§671-679 of the Internal Revenue

> Code.

I read these earlier. Unfortunately I could not make out much from
them.

> I'm not familiar with Miller trusts. But it appears that they

> are set up with the intent that money in the trust will be used for the

> benefit of the grantor who set up the trust in the first place.

> If that's accurate,

The reason I am not sure is because the Miller trust disallows use of
any income over the stipulated Medicaid amount. The excess of the
grantor's income that otherwise would go to her/him must stay in the
trust until the beneficiary dies. Upon death, and under federal
Medicaid law, whatever is in the trust goes to the state, up to the
medical expenses that have been incurred.

> then under §673, that appears to me that would

> necessarily be a grantor trust.

I see two states (Kentucky and Tennessee, using the term "QIT" or
"Qualified Income Trust," one of a few synonmous terms for "Miller
Trust") that say at a few web sites that in their states, these trusts
are grantor trusts. But there seems to be little on this for other
states.

> > Sometimes the trust documents explicitly state whether it is a

> > grantor trust; they are worth reviewing.

> Generally a trust will say whether it is revocable or irrevocable, but

> not whether or not they are grantor trusts. Revocable trusts are

> always grantor trusts. Irrevocable trusts may or may not be depending

> on their terms.

Well the above helps. From my reading, all Miller trusts are
irrevocable. Otherwise I cannot tell whether the status (grantor or
non-grantor) of these trusts is up to each state.

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