Trust Fund Income

[Burke]

Trust fund income is passed through to beneficiaries on K-1's to the extent of distributions as far as their tax returns are concerned. That part is easy. But, I have two situations (with two different clients) for which I cannot definitively say whether the distributions are considered to be "income."


1. On the FAFSA form. Beneficiary of trust is filing for financial aid for dependent child (not a current beneficiary). Are distributions listed in parents' income? If the parent is also the trustee, and has discretion to withdraw funds, is the trust considered an asset of the parent on the form?

2. For ACA reporting purposes. Beneficiary of trust has gone to marketplace for insurance and has been receiving a monthly subsidy. Client has received letter asking for income verification. Are the trust distributions considered "household income?" The total distributions may not be taxable on the 1040, but they far exceed the actual taxable amount. Client is not the trustee of the trust, but it pays for anything the TP needs. (Which could include health insurance under the terms of the trust.)

[Mo Sheets]

Trust Income

Hi Burke,

First let me say I have no authoritative proof to back up my statements...just my initial thoughts as a trustee for a trust.

For your first scenario, before I would make a final determination, I would request a copy of the trust agreement. Most of the trusts will not allow you to leave a beneficiaries share in trust past the age of 35 years old. In your first situation, if the parent is the beneficiary of the trust (their child may also be a beneficiary at a later date), I would try to discern whether the parent is receiving corpus (asset), income from the trust, or a combination of both. If they have a college-age student, I would think the parents are at least 35 years old. If the distribution is corpus, it is an asset the parent would need to list on the FAFSA form. If the distribution is income, it will need to be included in their current year income and listed as such. The beneficiary would not include any corpus/income that has not yet been distributed, because in the event of the beneficiary's death, their share would go to another named beneficiary.

Your second scenario is more difficult given the fact the beneficiary is not the trustee and the trustee has discretion when deciding what expenses to pay. It almost seems to me if the funds are available from the trust to pay health care expenses (spelled out in the trust document), I wouldn't think the beneficiary could claim the monthly subsidy...again, just my initial thoughts...will wait to hear what others think or better yet, can provide a cite.

Mo

[Koss]

Fafsa

Because the parent is both the trustee and the beneficiary, and has the right to make distributions to himself/herself, the portion of the distributions that is income should be included in the parent's income. That portion of the distributions that is a nontaxable distribution of the trust corpus is not income.

However, if the parent, as trustee, also has the right to withdraw money or other assets from the corpus, then the total value of the trust corpus needs to be included in the parent's assets.

The basic principles are pretty straightforward. A revocable trust cannot be used to exclude income or assets from the formula that is used to evaluate eligibility for financial aid. If the trust is irrevocable, and the trustee is not the beneficiary, and the trustee has discretion, so that distributions are not required, and the beneficiary does not have the right to any distributions, that's a different ball game. But most trusts don't meet these criteria.

Here's what it says in the FAFSA application instructions:

- - -
Investments include real estate (do not include the home in which you live), rental property (includes a unit within a family home that has its own entrance, kitchen, and bath rented to someone other than a family member), trust funds, UGMA and UTMA accounts, money market funds, mutual funds, certificates of deposit, stocks, stock options, bonds, other securities, installment and land sale contracts (including mortgages held), commodities, etc.
- - -

The instructions also say that the student must report certain items as "other untaxed income," which includes:

- - -
Money received, or paid on your behalf (e.g., bills), not reported elsewhere on this form. This includes money that you received from a parent whose financial information is not reported on this form and that is not part of a legal child support agreement.
- - -

You can read the complete FAFSA application, with all the instructions, without logging into the FAFSA website. It is still possible to file a paper FAFSA. The form and instructions are available as a PDF:

https://fafsa.ed.gov/fotw1516/pdf/PdfFafsa15-16.pdf

If you're going to complete FAFSA applications, or even just advise your client on how to complete certain lines, you should read this thing very carefully.

BMK

[Burke]

That is exactly what I felt should be the case on the FAFSA situation. And it seems certain, given this information, that the trust assets should be reported on the parents' part of the FAFSA. It is not an RLT, it is an irrevocable trust, recently inherited due to the death of the grandparent. I have the trust document and I do the trust tax return. Income is required to be paid at least annually, and it will flow through to the parents' tax return. The parent who is beneficiary and trustee also received discretionary distributions. Some of these distributions were used to pay college tuition for the child by the parent. So, the entire corpus of the trust, IMO, goes into the parent's asset information. Then, the distributions used to pay tuition for the child should go into the income section for the child as paid on his behalf? I am interpreting the above to say that it is omitted, since the parent's assets information IS reported on the form. Just listing the parents' financial info may eliminate any financial aid. I am not sure what the cut-off is. (I am not completing the form.)

As far as the ACA issue is concerned, I cannot find where trust distributions would enter into the reporting process of "household income." It is listed neither in the items required to be used, or not used in the calculation of MAGI.

[Burke]

Your second scenario is more difficult given the fact the beneficiary is not the trustee and the trustee has discretion when deciding what expenses to pay. It almost seems to me if the funds are available from the trust to pay health care expenses (spelled out in the trust document), I wouldn't think the beneficiary could claim the monthly subsidy...again, just my initial thoughts...will wait to hear what others think or better yet, can provide a cite.
Mo

Yes, it makes sense to me. But as I referred to in the post above, it does not appear that this trust fund makes any difference in the calculation of MAGI for ACA purposes. The beneficiary does use the taxable income from the trust as that is on the tax return. But the taxable income is way less than the total distributions made available for the beneficiary's living expenses.