Not sure if what AI says is correct but I might have answered my own question.
“AI Overview
A distribution from an estate or trust reported on
Form 1041 Schedule K-1 can be paid directly to a beneficiary or a third party, such as an assisted living facility, for the beneficiary's benefit. The tax treatment and reporting on the Schedule K-1 remain the same in either case.
Key Points
- Payment Destination is Flexible: The IRS is primarily concerned with the taxability of the distribution, not the physical destination of the funds. A payment made to a third party on behalf of a beneficiary is considered, for tax purposes, to be a payment made to the beneficiary directly.
- Income Distribution Deduction (IDD): The estate or trust takes an income distribution deduction on Form 1041 for the amounts distributed. This shifts the tax burden from the trust/estate to the beneficiary.
- Schedule K-1 Reporting: The amount distributed (whether to the beneficiary's bank account or the assisted living facility) is reported on Schedule K-1 and provided to the beneficiary. The beneficiary then reports this income on their individual tax return (Form 1040).
- Governing Instrument: The fiduciary must ensure the payment is permitted by the terms of the will or trust instrument and applicable local law. The governing document often gives the trustee the power to make payments for the beneficiary's benefit (e.g., for housing, medical care) rather than directly to them, especially if the beneficiary has a disability or other legal limitation.
- Medical Expenses: Payments made to an assisted living facility for medical care may be tax-deductible as medical expenses for the beneficiary on their personal tax return, subject to IRS limitations. The trust cannot take these as a medical expense deduction, but rather as an income distribution deduction.
In summary, paying the assisted living facility directly for the beneficiary's benefit is a common and acceptable practice, provided it aligns with the trust document, and it is correctly reported on Schedule K-1.”
