Can I Pay Medical Expenses From an Irrevocable Trust?

By Tom Streissguth

A trust is a method of placing assets under the control of a trustee, for the purpose of passing these assets to beneficiaries. An irrevocable trust can't be changed or revoked by the grantor of the trust. With this arrangement, the assets pass to heirs outside of a probate court and escape federal estate tax. One legal purpose of a trust would be to pay medical expenses on behalf of a beneficiary.

Trust Structure

The grantor, or settlor, is the individual who sets up a trust. The grantor appoints a trustee, and includes in the trust document instructions for how the trust assets should pass to the beneficiaries. The grantor must retitle assets in the name of the trust, which can hold cash, investments, real estate, valuables and businesses. If the trust generates and retains income, then it pays taxes; if it passes income to beneficiaries, then the beneficiaries must report that income and pay the appropriate state and federal taxes.

Payment of Medical Expenses

A trust may pay medical expenses for a beneficiary. With an irrevocable trust, the grantor must give specific instructions in the trust document on how the trustee is to pay expenses. A medical provider may also allow a trust to become the "responsible party" for an individual patient's billing. This would be a useful arrangement for an individual with a severe or ongoing disability who has few resources of his own to meet medical expenses. In a "special needs" trust, the grantor specifically dedicates trust assets to medical care, rehabilitation, physical therapy and other services for a disabled individual. This means a public agency deciding on a beneficiary's eligibility for a means-tested benefit program will not consider the trust as "available" assets.

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Asset Control

The grantor of an irrevocable trust gives up control over the trust assets. He may not change the trust or its terms. A grantor may place more assets into the trust, but may not contribute to the trust in order to meet trust obligations. If the beneficiary of a trust incurs a medical bill, for example, the grantor should not make a gift to the trust to cover that bill, or give instructions to the trustee on which bills to pay. This would represent direct control over trust assets by the grantor.

Beneficiary Withdrawal Rights

Contributions to a trust may subject the donor to IRS gift taxes; however, there is a gift-tax exclusion as of 2014 of $14,000 a year, as long as the contributions are available for withdrawal by a beneficiary -- for medical expenses, for example. The beneficiaries must be notified of this right, according to the IRS rules. A grantor may use the trust document to designate which beneficiaries are eligible to make withdrawals, and limit the withdrawals as well. However, if the contributions exceed the withdrawal rights, then the gift tax comes into play, and the donor must file a gift tax return for the year he made the contribution.

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A Living Trust Explained

A living trust is a legal device that establishes how your property is to be transferred upon death, but goes into effect during your lifetime. The grantor, who puts his property into the trust, assigns a trustee to administer the trust on behalf of a beneficiary. There are several types of living trusts. In comparison, a testamentary trust is created by the terms of a will and does not go into effect until death. Living trusts avoid probate but testamentary trusts do not.

Trustee Not Paying Beneficiary

A trustee is a party who administers the assets of a trust and distributes them to beneficiaries in compliance with terms established by the trust grantor. Although the terms of a trust often allow a trustee considerable discretion with respect to the distribution of assets to beneficiaries, beneficiaries have legal options if the trustee's refusal to distribute trust assets appears to be unjustified.

How to Get Notified if You're an Heir to a Trust

A trust is a legal and financial structure that holds assets, and pays beneficiaries, according to the instructions of a grantor. The grantor appoints a trustee to manage the trust. By the terms of a will, a trustee may be responsible for paying the grantor's heirs out of trust assets. A trust may also benefit a group, business or charity. State laws and guidelines determine how a trustee or grantor notifies the beneficiaries. If you believe you may be the beneficiary of a trust but have not received notice required by law, your best course may be to seek professional legal advice.

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