What types of income distributions are there?

  • mandatory distributions to grantor
  • mandatory distributions to third parties
  • discretionary distributions to grantor
  • discretionary distributions to third parties
  • sprinkling provisions
  • accumulating income

For each type of distributions, we need to analyze the consequences:

  1. income tax while the grantor is alive
  2. gift tax
  3. protection from creditors
  4. Medicaid
  5. estate tax
  6. income tax while the grantor is alive

There can be additional consequences to consider, such as property tax.

Distributions to Grantor

Distributions to the grantor can be:

  • mandatory
  • discretionary
  • sprinkling

Distributions to the grantor make the trust a self-settled trust because the grantor is a beneficiary.

For purposes of Medicaid, when the grantor can receive income from the trust, Medicaid deems the trust’s income to be available to the grantor. 18 NYCRR 360-4.5(b)(1)(ii).

A trust cannot provide the grantor with income and terminate the income when the grantor needs long-term care. EPTL 7-3.1(c).