QUESTIONS ON MEDICAID ASSET PROTECTION TRUST

[dr58lj15]

I have several questions concerning a Medicaid Asset Protection Trust.  The trust was established by their attorney with all quit claims deeds established to the Trustee and Beneficiary for both houses described below.

The client has two houses.   One house they personally live in, and one house is rented by their disabled daughter.   

I am moving the Rental house from their personal return to the 1041.  I am disposing of the rental house. Do they have to recapture the prior depreciation as if this house was sold?   What cost basis do I use to set up the rental house on the 1041?   Those are my first two questions.

Concerning their personal house which does not incur any earnings like the rental.  Where and how do I enter the personal house on the 1041 in Proseries?

This Trust is an irrevocable trust with both Grantors still living.   Do I choose complex trust on the 1041 screen?

I appreciate any help you can give for these questions.

[sjrcpa]

1. File extensions. April 8 is not the time to learn about trusts.

2. You need to get the Trust Agreement and read it.

[sjrcpa]

Also file extension for their personal tax return. That will extend the gift tax returns they are probably supposed to file.

[IntuitAmyC2]

I agree this is complex. You need the trust agreement. 

The rental property transfer was a gift for Medicaid purposes but may not have been for tax purposes. Find out if the Grantors kept a Limited power of appointment. If so, it is incomplete for gift tax and the heirs can receive a stepped up basis upon the Grantor's death.

The personal house generates no income so it is not listed.

Check the Trust Document:

• If it is a Grantor Trust: You do not file a traditional 1041. You file a "pro forma" 1041 with a Grantor Trust Information Letter attached, or simply report everything on the grantors' 1040. In this scenario, the rental stays on the 1040 (Sch E), and nothing changes regarding depreciation.
• If it is a Complex Trust: You only select "Complex" if the trust is required to distribute all income but doesn't, or if it distributes principal. Most MAPTs that are not Grantor Trusts default to Complex.

Good luck! Side note: The IRS ruled in Rev. Rul. 2023-2 that simply being a "Grantor Trust" is not enough to get a step-up in basis. The assets must be included in the Grantor's gross estate for estate tax purposes.