How do I report $69k taken as caregiving services for 13 years after mom was placed in a care facility?

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My sister paid herself after my mother was placed in a care facility for severe dementia. I am the trustee and not sure if I can file a W2 on those monies since she (sister) claims it was income.

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Carla, thanks for the explanation. I'm afraid that my brain is too fogged right now to follow your logic, so I'll mull it over and respond later.

The trusts with which I'm experienced were initially funded by transfer of title, then periodically continued to be funded with dividends and cap gains. Had there been an IRA, those distributions would have funded the trust as well, but would have been subject to tax in the year of distribution.

I need to think about the issue of taxability when funded, rather than after funding. This just isn't clear to me right now. The OP's mother would be in an age bracket that mandatory distributions from an IRA would be required, and that would mean annually. Or maybe the sister withdrew from the IRA in addition to the mandatory distributions?

I think you raise another issue, and that's payout to the beneficiaries. My understanding is that that payout wouldn't occur until after death, when the Trust became irrevocable. But there could also be a provision allowing periodic payouts.

Too little information, really. And I have a feeling that the OP won't be returning.

This is an interesting situation, but it would be helpful if we had more information.
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GA, the reason I surmised it was an IRA is that if a trust was funded with money that had already been taxed when originally received by the grantor, it would not be taxed again when paid out to the beneficiaries. Unless the contributions are deductible when made, which would require that tax be applied when the amounts are paid out. Same thing with an annuity. The OP is assuming that the distributions are taxable to the owner so I'm assuming that too, but only based on what the OP said. 

And you're right, if 13 years of taxable distributions were made by a bank out of any investment vehicle, the IRS would have been on it long before now, because they would have received 1099-Rs from the bank.  That's why I assumed the money was taken out all at once, after 13 years of caregiving.  And that it happened last year (and the IRS is questioning it now) or this year (and the IRS doesn't know about it yet).
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If the "trust" is in fact an IRA, then daughters are co-trustees of an IRA, not a Living Trust as I assumed. From this IRS Pub 590:

"Nonbank trustees or nonbank custodians (NBT) are described under Treasury Regulations Section 1.408-2(e). An entity that is not a bank (or an insurance company ... can request to be a nonbank trustee/custodian by applying in writing and demonstrating that certain requirements will be met in order to handle any of the following fiduciary accounts: ... [list of accounts] •Individual Retirement Arrangement (IRA)".

So it is possible that either or both qualified to be Trustee or Co-Trustees of an IRA.

However, rereading the OP's second post (and quoting b/c I don't want to misinterpret):

"Sadly my sister was placed on my mothers Trust Bank account incorrectly has POA (Just had huge issue with Bank when I need to be placed on the account as Co-Trustee) Prior to this my sister acted on POA to an Annuity account and withdrew the money without my knowledge. The funds were withdrawn without paying taxes ..."

OP, placed by whom on the account??

So sister withdrew funds from an annuity, which isn't to my knowledge equivalent to an IRA. OP, is this correct? We're talking about an annuity distribution, right?

So, to clarify, of what are these two sisters Co-Trustees? IRA? Annuity? Living or Irrevocable, or other kind of Trust?

If an IRA was involved, I can't conceive how this passed the IRS, which would have received a 1099-R (I believe that's the correct reference) for the year(s) of withdrawal from the entity that held the IRA. So should have the Trustee(s), although I don't which Co-Trustee would have been the designated recipient.

I can't conceive of the IRS not having contacted someone if taxes weren't paid, but were required.

There's another possibility and that is that there really is a Trust, such as a Living Trust, and the IRA, or annuity had been funded (and retitled in the name of the Trust).

My understanding of assets titled in a Trust are that they're taxed at the individual rate while the mother is living, but taxed at the accelerated rate after death. If that's still the case, the back taxes should be at the mother's individual rate.

So, we don't know whether there's a separate Trust; we don't know for sure if the withdrawal was from an annuity, or from an IRA.

And in any of those situations, this problem can't be solved here.

OP MRIEHM, you need to see a tax attorney who's an "enrolled agent". An ER is qualified to represent clients with the IRS, and I think at this point it's the only way you're going to be able to address the tax issue first and foremost and learn what penalties might be assessed.

If you can find an attorney in a firm which also has an elder law practice, you can address the issue of caregiving funds. But first you have to address the issue of potential back taxes.

And if the two of you are Co-Trustees of either an annuity or IRA, I think you can expect the IRA to take a dim view of the failure to address taxes until now. That's not a criticism, just a "be prepared" caution.

And I do hope the OP returns to clarify these issues.
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Right, what BarbBrooklyn said. The companionship exemption is a DOL rule, not an IRS rule. So I think Katiekate is right. I'm not sure it necessarily follows that if adult children are paid as caregivers, they need to be treated and taxed as household employees though. I'd definitely check with a cpa to find out if there is any wiggle room in that.
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Companionship, as opposed to caregiving, is exempt from the minimum wage protection afforded caregivers. But I'm not at all clear that it's exempt from tax withholding.

Eldercare lawyer needed!
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Carla. I do not see in the IRS website where companionship service is exempt at all. It seem pretty clear cut...all in-home domestic service providers are to be treated as employees as it pertains to tax withholding. I saw no exceptions in the law as quoted on the .gov website.
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I don't know how much money she may owe, but if it is a considerable amount it is worth taking this to a cpa who knows the ins an outs of trusts and tax law.
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I didn't get that impression, cwillie. If correct, that's a whole different ballgame. But I think the IRS would have come back and questioned the failure to include the income in a prior year because the IRA trustee would have sent a 1099-r to both the IRS and the owner of the IRA.
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Sounds like the money was paid out over 13 years, not one. Does anyone know if there is a possibility of dealing with the payments retroactively?
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I don't know it's as clearcut as you (Katiekate) say. For one thing, companionship services seem to be exempted. But there's a limit on how much time can be considered companionship services, and that's complicated by having all the money paid out in one year. 69K sounds like a full-time job, not a few hours a week. That's why I think some sort of specialist is needed here.
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