Irrevocable Income Diversion Trust Tax Question

by Susan
(New Mexico)

I am the trustee of an Irrevocable Income Diversion Trust for my mother, in trust to the state of New Mexico Medicaid program. What are my tax obligations for her?


No income tax is deducted from her monthly retirement check into the trust. The IRS has been no help, and I am not able to use any of the trust money for a CPA. Obviously her medical costs exceed her income, but Medicaid technically picks these expenses. I don't think I have to file for the trust, but her personal retirement check seems to still count as income.

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Mar 21, 2011
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by: Gabriel Heiser

The income diversion trust--also known as a "Miller Trust" or "Qualified Income Trust," is used when a Medicaid recipient's income exceeds a certain level"(currently $2,022), but their overall income is still less than the cost of the nursing home. Such trusts are "grantor trusts" meaning that all the income is taxable to the grantor (i.e., the Medicaid recipient).

Although the trust is an irrevocable trust, the federal tax rules allow for the trustee of the trust to use either a tax i.d. number for the trust itself or use the Social Security number of the grantor/recipient, and attach a form to the Form 1041 that lists the income and expenses. The tax i.d. rules are found here: Treas. Reg. 301.6109-1(a)(2)(i) and the reporting requirements are found here: Treas. Reg. 1.671-4(b).

If you are still unsure how to proceed, I suggest you work with an accountant to make sure you understand what to do, at least for the first year. For future years, you will have a road map of what is required and probably won't need to consult with the accountant again.

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