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Revocable vs. Irrevocable Trusts as Employers of Caregivers

Posted by HomeWork Solutions on 10/10/23 11:30 AM
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When it comes to managing your assets and ensuring the well-being of your loved ones, trusts can be a valuable tool. Trusts provide a legal framework for holding and distributing assets, and they can also play a role in employing caregivers to provide necessary assistance. Let’s explore the difference between revocable and irrevocable trusts in the context of employing caregivers, particularly focusing on how an irrevocable trust can serve as the employer of record.

Revocable Trusts: A revocable trust, as the name suggests, can be altered, amended, or even revoked by the person who created it, known as the grantor. In the context of employing caregivers, a revocable trust is typically not used as the employer of record. Instead, the grantor, who maintains control over the trust, assumes the responsibility of employing and paying the caregiver.  If funding for an household employee comes from a revocable trust, the grantor usually still must obtain an Employer Identification Number (EIN) from the IRS, but employment taxes will be filed in the Grantor's name via Schedule H of IRS form 1040 and state employment tax accounts (for  Unemployment and Withholding taxes) will be opened in the Grantor's name.

Irrevocable Trusts: Unlike revocable trusts, an irrevocable trust, cannot be easily modified or revoked once it is established. The assets placed within an irrevocable trust are no longer under the direct control of the grantor, and the trust itself becomes a separate legal entity.

To function as an employer, an irrevocable trust must obtain its own Employer Identification Number (EIN) from the IRS. An EIN is a unique nine-digit number used to identify businesses and other entities for tax purposes. The trust will need to apply for an EIN, which serves as a tax ID number for the trust as an employer.

With an irrevocable trust acting as the employer of record, it assumes the responsibility for employing caregivers. This means that the trust, as a legal entity and directed by the Trustee(s), hires the caregiver, sets their salary, determines their employment terms, and takes care of various administrative tasks associated with being an employer. As the employer of record, the irrevocable trust is responsible for paying the caregiver's wages. The trust's assets are used to fund the caregiver's salary, and the trust's bank account is typically used to facilitate the payment process. It's important to note that the trust's assets should be sufficient to cover the caregiver's wages and related employment expenses.

Just like any other employer, the irrevocable trust is required to pay employer taxes on behalf of the caregiver. These employer taxes include Social Security and Medicare taxes, federal and state unemployment taxes (if applicable), and any other relevant payroll taxes. The trust should consult with a tax professional to ensure compliance with all applicable tax laws and regulations.

In summary, while revocable trusts generally don't serve as the employer of record, irrevocable trusts can take on this role. By obtaining an Employer Identification Number (EIN) and assuming the responsibilities of an employer, an irrevocable trust can manage the employment and payment of caregivers, ensuring proper care and support for your loved ones.  It's crucial to consult with legal and tax professionals to navigate the complexities of establishing and managing trusts, particularly when they involve employing caregivers.

Topics: senior care, nanny, agency, senior, CPA

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