- Amounts expended on supplies which are consumed in the course of the business are deductible.
- If rental or business property is mortgaged, payments of interest on the mortgage are deductible from business or rental income; however, payments of principal are not deductible.
This trust will take advantage of the Internal Revenue Code Sections 671-677, and takes advantage of the differential tax treatment for income tax purposes. For most veterans, the major asset in this trust is the residence. If the veteran owns the residence as an individual and sells it, then the proceeds will be part of the veteran’s Net Worth and will disqualify the veteran for the VA Pension Benefit. However, if the residence is in the trust and sold by the trustee of the trust, the proceeds from the sale of the house is not imputed to the veteran by VA. By transferring the residence to the IDGT, the veteran has already transferred the asset for VA purposes and it is not part of his Net Worth any more. Also, by transferring the residence and some other assets to this trust, the veteran has started to run the 5 year look back period for Medicaid purposes. If the veteran gets on Medicaid in the future (more than 5 years later), the assets in the trust are not subject to the state estate recovery under Texas Law.
The veteran is a grantor but not a beneficiary. Perhaps, the veteran’s children or friends can be the beneficiaries. The trust agreement provides rights and duties of the trustee so that trustee can make discretionary distributions to the beneficiaries. It is better for the trust agreement not to provide any mandatory distribution language for beneficiaries. The distribution standard should be totally discretionary. Also, it is recommended that the trust agreement provides for the Trust Protector which has an absolute power to remove and replace Trustee at its discretion. With this mechanism, trustee can withhold distributions to any beneficiary that does not enhance the goal of the veteran’s asset protection planning. Also, the trust protector can remove any trustee which does not enhance the goal of the grantor’s asset protection planning, and it can replace with another trustee which will be more sympathetic to the grantor’s asset protection planning. By establishing this trust, the veteran can have a more control over how the assets in the trust are going to be distributed and used, although the veteran himself/herself has no legal control over the trust assets.
Some Advantages of IDGT:
- The trust can hold and sell a veteran’s residence, and keep the proceeds. The proceeds will not disqualify the veteran for VA pension or Medicaid during the lifetime of the veteran;
- Proceeds for the sale of the residence are not subject to estate recovery by the Medicaid Agency;
- Trustee of the trust can sell the residence and still take advantage of Internal Revenue Code Section 121 capital gain exemption up to $250,000;
- At the death of the grantor, the trust assets will receive a step-up in basis for income tax purposes;
- It will keep the assets out of the hands of irresponsible children. It is said that the average length of period that children will keep the assets received from their parents is 18 months. This trust will prevent irresponsible children from using up all the assets if the parent transfers them directly to them;
- Claimant can ascertain trough the power of trustee, trust protector, and with skillfully drafted trust provisions, that responsible and caring children get more distributions of assets than those who are not. We know from our experience that good caring children will use the money for good causes, such as spending money for their good parents, right?!
However, this trust requires drafting attorneys to have high-level knowledge of trust law (both federal and state), tax law, and VA and Medicaid law. Having a bad provision in a trust agreement is fatal. Please consult an attorney who practices in these areas of law in your state.