Technical topics regarding tax preparation.
27-May-2023 1:06pm
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Grantor passed. Irrevocable Trust (IT) setup to hold all assets. Wife is sole beneficiary. Wife has parkinsons and memory issues. She lives full time in assisted living. IT pays monthly $10k fees. For our discussion, let's assume 100% of fees are eligible medical expenses.
Can the IT take a tax deduction on the 1041 for the fees? If yes, are the amounts subject to any limitiations?
Thanks.
28-May-2023 8:27am
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Those expenses are incurred by and are the obligation of the wife, so wouldn't their payment by the trust be a constructive distribution to wife followed by a constructive payment of medical expenses by her?
28-May-2023 10:36am
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That’s what someone else said. It’s sounding right. But can wife take deduction for payment paid by trust? I think for clearer trail, better for trust to pay cash distribution to wife and then have trustee pay fees directly from wife bank account. Clear trail she paid.
28-May-2023 10:38am
Big E
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But if husband is deceased, how can a medical deduction be taken unless it's in the same tax year?
28-May-2023 1:50pm
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I agree with Nilodop in #2.
Steve
28-May-2023 6:24pm
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But can wife take deduction for payment paid by trust?. That's the idea of a constructive payment. Lots written on constructive receipt and constructive payment. And, while not involving a trust, check out the
Judith Lang case in which mother paid a medical expense of her adult daughter (who was not a dependent and for which she had no obligation to pay). Here's an excerpt.
Applying substance over form, we treat petitioner as having received from her mother a gift of $24,559 with which petitioner paid her own medical expenses. Petitioner should be credited with having made the payments for purposes of the income tax deduction in question.
. Plus payment directly to the medical provider avoids gift treatment for gift tax purposes.
But if husband is deceased, how can a medical deduction be taken unless it's in the same tax year?. Trust paid it, not husband.
29-May-2023 10:57am
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Can the IT take a tax deduction on the 1041 for the fees?
No. These are “on behalf of” payments, treated as a distribution for trust tax purposes. As such, these payments (and any other real and deemed distributions) will carry out DNI on a K1 to the bene. And then the bene deducts the medical expenses.
29-May-2023 12:06pm
Big E
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So if the trust pays a medical expense in Year 1 by virtue of a distribution to widow in Year 2 for a medical bill incurred in year 1, widow can still take the medical deduction in year 2? (Assuming of course it's a totally legit bill and widow can itemize).
29-May-2023 1:24pm
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So if the trust pays a medical expense in Year 1 by virtue of a distribution to widow in Year 2 for a medical bill incurred in year 1, widow can still take the medical deduction in year 2?
I don’t understand. If trust pays a medical expense in Year1, why would it be a Year2 distribution? (And if an actual cash distribution was made to the widow in Year2, the timing of the medical deduction would hinge on when the widow paid the related medical bill. Such a trust distribution would not be a “for the benefit of” variety. But we’re not talking about that here: We’re talking about payments made directly by the Trust to the medical care provider).
You also made a comment in Post #4, but it wasn’t on point. Doesn’t matter when husband died. Wife is the widow/survivor. The trust is for her benefit and it is her medical expenses the trust is paying directly. We’re talking about her medical expenses.
(And not that it’s been brought up yet – unless you are suggesting it with your comment - is the impact of the 65-day election).
29-May-2023 1:37pm
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Jeff-Ohio's #7 is more complete and accurate than my #2. His expanded comments in #9 are also right on, along with his allusion to 663(b) and its related reg.
29-May-2023 1:41pm
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Let's keep this simple.
this has nothing to do with the year the husband passed. I think we agree on that.
The IT pays medical expenses in 2023. They are for fees the surviving spouse needs paid for her 2023 assisted living facility .
sounds like the consensus is that the payments made in 2023 are distributions. Amounts to be listed on the 2023 k1. Surviving spouse will deduct those on her 2023 1040, subject to 7.5% medical limitation.
All sound good?
29-May-2023 1:56pm
Big E
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I had misread post #1. Since "grantor" was mentioned, was assuming that the medical expenses incurred were for
deceased grantor.
29-May-2023 3:18pm
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29-May-2023 6:56pm
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Very helpful thread. Thanks to all of you for your comments
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