Just yesterday, I encountered an issue that comes up time and time again when banks don’t understand the tax treatment of trusts where you retain income. A client in Mandeville who set up an irrevocable trust to protect assets from Nursing Home Poverty was getting pushback from their bank when trying to open a bank account in the name of their new trust. The bank was insistent that because the trust was an irrevocable trust it needed to use a separate EIN or Tax ID Number.
The bank did not realize that whether the trust is irrevocable or not makes no difference. What truly matters is whether or not the trust is treated as a grantor trust: The IRS says this about grantor trusts:
“Grantor trust” is a term used in the Internal Revenue Code to describe any trust over which the grantor or other owner retains the power to control or direct the trust’s income or assets. If a grantor retains certain powers over or benefits in a trust, the income of the trust will be taxed to the grantor, rather than to the trust. (Examples, the power to decide who receives income, the power to vote or to direct the vote of the stock held by the trust or to control the investment of the trust funds, the power to revoke the trust, etc.) All “revocable trusts” are by definition grantor trusts. An “irrevocable trust” can be treated as a grantor trust if any of the grantor trust definitions contained in Internal Code §§ 671, 673, 674, 675, 676, or 677 are met. If a trust is a grantor trust, then the grantor is treated as the owner of the assets, the trust is disregarded as a separate tax entity, and all income is taxed to the grantor.
The IRS does not require or recommend obtaining an EIN/Tax ID Number for “Grantor Trusts.”
Most Medicaid Irrevocable Trusts are considered grantor trusts because the people who create the trust are also entitled to all the income from the trust. Because the grantors are still considered the owner of assets in their trust for tax purposes, there is no need to issue a new tax ID number. In fact, issuing a tax id number to a non-taxable entity would be poor legal practice as it would lead to confusion when 1099’s are issued at year end.
To find out how to best structure a Louisiana Trust to protect your assets from Nursing Home and unnecessary taxes call (504) 274-1980 in the Metairie and New Orleans Area or call (985) 246-3020 in Mandeville, Covington, Slidell, Houma, Thibodaux, and surrounding areas.