What Expenses Can Be Paid From an Irrevocable Trust?
Understanding what expenses can be paid from an irrevocable trust is essential for trustees, beneficiaries, and anyone involved in estate planning. Unlike a revocable trust where the grantor maintains full control, an irrevocable trust operates as a separate legal entity with strict rules governing how trust funds can be used.
This guide breaks down the categories of allowable expenses, explains how the trust document and state law interact, and highlights the pitfalls that can undermine your planning objectives.
Introduction to Irrevocable Trusts
An irrevocable trust is a powerful estate planning tool designed to provide lasting financial security and protect assets for beneficiaries. Once an irrevocable trust is established, its terms generally cannot be changed, amended, or dissolved without court approval or the unanimous consent of all beneficiaries. This permanence is what gives an irrevocable trust its strength in safeguarding assets from creditors, lawsuits, and estate taxes.
The primary concern when setting up an irrevocable trust is determining what expenses the trust can pay for beneficiaries. The trust document is the foundation that outlines how the irrevocable trust dispenses assets, specifying which beneficiary expenses are allowed and under what circumstances. Because these rules are binding, it is essential to seek legal guidance from an experienced estate planning attorney. Proper legal guidance ensures the trust is structured to meet the unique needs of your beneficiaries while complying with all relevant laws and regulations. By working closely with an attorney, you can create a trust that balances asset protection with the flexibility to address your family’s financial security for generations to come.
Quick Answer: What Can an Irrevocable Trust Pay For?
An irrevocable trust is a separate legal and tax entity that can only pay for expenses permitted by the trust agreement and applicable state and federal law. The trustee holds fiduciary duty to manage trust assets according to these rules—not according to what seems convenient or helpful at the moment.
Here are the main expense categories this article will explain:
Trustee and administration costs: Trustee compensation, legal fees, accounting, and investment management
Beneficiary support: Health, education, maintenance, and support (commonly called “HEMS”)
Property-related costs: Property taxes, insurance, maintenance, and repairs on trust-held real estate
Taxes and debts: Income taxes on trust income, estate taxes, and debts secured by trust property
Expenses explicitly authorized: Charitable giving, life insurance premiums, and other items spelled out in the trust
Critical warning: Expenses that benefit the grantor personally or non-beneficiaries are almost always prohibited. Paying such expenses can destroy asset protection, trigger estate tax inclusion, or disqualify a beneficiary from Medicaid or SSI.
This article reflects U.S. law as of 2024. Exact rules vary significantly by state. For example, New York has statutory schedules for trustee compensation under SCPA 2309, while California allows “reasonable” fees based on work performed. Similarly, New York taxes trust income based on where the trust is administered, while California taxes trusts based on the residence of fiduciaries and beneficiaries.
What Determines Which Expenses an Irrevocable Trust Can Pay from Trust Assets?
Three factors control what expenses qualify for payment from an irrevocable trust: the trust document itself, state trust law, and the specific type of irrevocable trust you’re dealing with.
The trust agreement is primary: Most trust documents use distribution standards like “HEMS” (health, education, maintenance, and support) or language authorizing payments for “necessary and reasonable support.” A 2022 New York Medicaid Asset Protection Trust, for instance, might explicitly limit principal distributions to exclude long-term care costs for the grantor—making that category of expense completely off-limits regardless of need. The trustee's discretion plays a crucial role in interpreting and applying these provisions. Depending on the trust's terms, the trustee may have authority to decide, at their discretion, whether certain expenses—such as education or support—are paid from the trust.
State trust statutes fill the gaps: When the trust document is silent on a particular issue, state law provides default rules. The New York Estates, Powers and Trusts Law (EPTL) and California Probate Code define trustee powers, fee structures, and accounting requirements. Florida Statutes §736.04113 even allows limited modifications if they align with the trust’s original purpose.
Federal tax rules affect treatment, not authorization: The Internal Revenue Code (Subchapter J) and distributable net income (DNI) rules determine whether an expense is deductible on the trust’s Form 1041 or whether a distribution is taxable to the beneficiary. These rules don’t authorize expenses—they only classify them for tax purposes.
Public benefits rules add another layer: When a trust is designed for Medicaid planning or serves a beneficiary receiving SSI, improper payments can disqualify the beneficiary from government benefits. This is why structuring distributions correctly is critical in these situations.
Trust Administration and Management Expenses
Virtually every irrevocable trust can pay its own administration costs and professional fees. These commonly approved expenses are often deductible on the trust’s income tax return (Form 1041) under IRC §67(e), provided they are expenses that wouldn’t be incurred by an individual taxpayer.
Trustee compensation: Individual trustees typically charge 0.5% to 1.5% of trust assets annually, depending on the complexity of administration. Corporate trustees often use tiered fee schedules (e.g., 1% on the first $1 million, 0.75% on the next $2 million). Some states like New York have statutory fee schedules, while others simply require fees to be “reasonable” based on work performed. All payments require trustee approval documentation.
Accounting and tax preparation fees: The trust must file an annual Form 1041 (and potentially state fiduciary returns) and issue K-1s to beneficiaries. Periodic accountings may be required by probate court or demanded by beneficiaries under state law. These essential expenses are routinely paid from trust income or principal.
Legal fees: Trusts can pay for drafting amendments through decanting (where permitted), obtaining court instructions on ambiguous provisions, defending the trust in litigation, and interpreting trust terms. The legal fees must relate to trust administration—not personal legal issues of the trustee or beneficiaries. A 2022 New York case resulted in a $200,000 surcharge when a trustee paid excessive travel reimbursements that the court deemed outside proper administration.
Investment management and advisory fees: For a $750,000 portfolio, a 0.75% annual advisory fee ($5,625/year) would be typical. Real estate management companies handling rental properties might charge 8-10% of collected rents. These costs are appropriate when directly tied to managing trust assets.
Routine administrative costs: Bank charges, postage for beneficiary statements, safe deposit box fees, and document storage are all permissible. Proper documentation of these expenses protects the trustee from future challenges.
Beneficiary Support: What an Irrevocable Trust Can Pay For Beneficiaries
Most grantors establish irrevocable trusts to provide long term financial security for their loved ones. What the trust can actually pay depends on its distribution standard—whether that’s the HEMS standard, pure discretion, or mandatory income distributions.
General support and maintenance: Trust distributions commonly cover beneficiaries living expenses including rent or mortgage payments, utilities, groceries, clothing, and basic transportation. Many trustees pay these directly to landlords or vendors rather than making direct cash payments to the beneficiary, which helps maintain control and creates clear documentation of how trust dispenses assets.
Healthcare and medical needs: A properly managed trust can pay health insurance premiums, co pays prescription medications, deductibles, dental and vision care, and other medical and health costs. For example, a trust might pay $15,000 for a 2025 surgery or fund ongoing therapy sessions at $200 per week. Trustees should structure medical payments carefully and coordinate with Medicare, Medicaid, or private insurance to specifically cover medical expenses without creating coverage gaps or benefit issues.
Education and career development: Heirs education expenses are among the most common trust expenditures. Trusts routinely pay K-12 private schools tuition, college and graduate school costs, trade school programs, bar exam courses, and professional licensing fees. A typical 2024-2025 academic year might involve paying $65,000 directly to a university for tuition plus room and board, plus $2,000 in registration fees and textbooks. Whether these education-related expenses are covered often depends on the trustee's discretion and the specific provisions of the trust document.
Quality-of-life and discretionary spending: Depending on the trust’s terms, trustees may authorize travel, hobbies, adaptive technology, internet service, or a modest vehicle. However, obviously extravagant expenses—repeated luxury vacations or sports cars—can violate the trustee’s fiduciary duty if they drain trust assets or conflict with the trust’s purpose. The trustee’s discretion must balance beneficiaries maintain independence with preserving trust assets for the future.
Cash distributions: Direct distributions of cash are often limited or prohibited, especially in special needs or Medicaid-focused trusts. When allowed, cash payments may shift taxable income to the beneficiary under DNI rules. This can be beneficial (if the beneficiary is in a lower tax bracket) or problematic (if it affects government aid eligibility).
Property, Real Estate, Insurance, and Medical and Health Costs Expenses
Many irrevocable trusts hold real estate—perhaps a residence transferred in 2023 for Medicaid planning or a rental duplex acquired in 2018 for income generation. The trust must pay to preserve and insure these assets appropriately.
Routine property costs: Property taxes, homeowner association dues, utilities, and mortgage payments tied to trust-owned real estate are standard trust payments. These expenses are appropriate when the property is titled in the trust’s name. A trust holding a $500,000 primary residence might pay $8,000 annually in property taxes and $3,600 in HOA dues.
Maintenance costs and repairs: Roof replacement, plumbing repairs, landscaping, and safety improvements fall within normal trust administration. Capital improvements may affect the property’s tax basis and should be well-documented with invoices and contractor agreements. A 2024 HVAC replacement costing $12,000 would be a legitimate expense from trust funds.
Insurance premiums: The trust should pay homeowners insurance, landlord policies for rental units, umbrella liability coverage, and insurance on valuable personal property held by the trust. When the trust is the owner or named insured, premiums logically come from trust accounts. Auto insurance on trust-owned vehicles is also appropriate.
Rental or business real estate expenses: For income-producing properties, the trust can pay property management fees (typically 8-10% of rents), advertising for tenants, legal costs relating to leases, and necessary licenses or permits. A 2024 lease dispute handled by the trust’s attorney would appropriately be paid from the trust.
Grantor-occupied property caution: If the grantor continues living in a home owned by a Medicaid Asset Protection Trust, advisors must confirm that paying housing expenses doesn’t adversely affect Medicaid eligibility in that state. Some states allow the trust to pay property taxes and insurance while the grantor pays utilities; others have different rules.
Taxes, Debts, and Other Obligations of the Trust
An irrevocable trust is generally treated as its own taxpayer with its own EIN and filing requirements. It may also satisfy certain expenses align with debts tied to trust assets.
Income taxes on trust income: The trust must pay federal income taxes (reported on Form 1041) and any applicable state fiduciary income taxes. Irrevocable trusts face compressed federal tax brackets—reaching 37% on income over $14,450 in 2023. Distributions often carry out DNI so that beneficiaries, rather than the trust, pay the tax at their individual rates. This creates important tax implications for distribution timing.
Property and local taxes: Real estate taxes on trust-owned homes and rentals are paid from the trust. Personal property or business taxes in certain expenses jurisdictions also apply—for example, a 2024 business tangible property tax bill of $3,500 on equipment held by the trust would be a legitimate payment.
Estate, inheritance, and GST taxes: Some irrevocable trusts are specifically designed to manage transfer taxes. Insurance trusts and GST dynasty trusts can use trust assets to pay estate taxes if the trust document authorizes it. The 2024 federal estate tax exemption is $13.61 million per individual, but trusts holding appreciating assets can help shield growth beyond this threshold.
Debts and liabilities: Mortgages secured by trust property, loans the trust has incurred, and creditor claims the trust is authorized to pay after the grantor’s death are legitimate. However, this differs from paying personal debts of beneficiaries—which is usually prohibited unless the trust specifically allows it.
Critical warning: Improper payment of a grantor’s or beneficiary’s personal debts from an irrevocable trust can undermine asset protection planning and cause the assets to be included in the grantor’s estate for tax purposes under IRC §§2036-2038. Seek legal guidance before making any debt payments that weren’t clearly anticipated in the trust document.
Specialized Irrevocable Trusts and Their Unique Expense Rules
Not all irrevocable trusts operate under the same rules. Medicaid Asset Protection Trusts, Special Needs Trusts, and Irrevocable Life Insurance Trusts each have distinct expense limitations—and violations can have serious consequences.
Medicaid Asset Protection Trusts (MAPTs): The primary concern with MAPTs is preserving Medicaid eligibility. Principal generally should never be used to pay the grantor’s nursing home or long-term care costs, or it can restart the Medicaid lookback period and jeopardize eligibility. Trust income may sometimes be distributed to the grantor or spouse, depending on state law. Consider a house transferred to a MAPT in 2019: the trust appropriately pays property taxes ($6,000/year) and insurance ($2,400/year), but nursing home bills must come from other sources.
Special Needs Trusts (SNTs): These trusts fund supplemental benefits without jeopardizing government benefits like SSI or Medicaid. The trust can pay for therapy, communication devices, travel to see family, personal care aides, and recreation—expenses that impact government benefits eligibility if paid as cash. For example, a trust might purchase a 2024 wheelchair-accessible van ($45,000) directly from the dealer, rather than giving the beneficiary cash. Direct cash payments to SNT beneficiaries are almost always prohibited because they count as income for benefit purposes.
Irrevocable Life Insurance Trusts (ILITs): The primary authorized expenses are insurance premiums (often substantial—$100,000 annually on a $20 million policy isn’t unusual for high-net-worth individuals), trust administration costs, and sometimes equalization gifts to beneficiaries after the insured’s death. Crummey notices create mailing and recordkeeping expenses that the trust pays. ILITs are powerful estate planning tools for keeping life insurance proceeds out of the grantor’s estate.
Charitable trusts: Charitable Remainder Trusts and Charitable Lead Trusts must make required payments to charities or non-charitable beneficiaries according to specific percentage or annuity formulas. They can pay their own administrative and investment costs, but the charitable component takes priority.
Commonly Prohibited or Risky Expenses
Paying the wrong expenses can undo years of careful planning—triggering tax penalties, destroying asset protection, or exposing the trustee to legal disputes and personal liability.
Expenses benefiting the grantor: Personal living costs of the grantor, personal debts, or payments that allow the grantor to treat trust funds like a personal checking account are almost always prohibited. This can cause estate tax inclusion under IRC §§2036-2038 and may defeat Medicaid planning entirely. The whole point of the irrevocable structure is that the grantor gives up control.
Expenses for non-beneficiaries: Paying for someone not named in the trust—like a friend’s tuition or a non-beneficiary family member’s medical bills—constitutes an unauthorized gift. This breaches fiduciary duty and can expose the trustee to surcharge. Other beneficiary distributions must go only to named beneficiaries.
Extravagant or unreasonable expenses: Luxury vehicles, repeated five-star international vacations, or speculative investments inappropriate for a 2025 retiree-beneficiary can all violate the trustee’s duty of prudence. A well managed trust balances current beneficiary needs with protecting assets for future beneficiaries. The reasonableness standard applies to all discretionary spending.
Expenses interfering with public benefits: In SNTs or MAPTs, incorrectly structured living expenses distributions—especially cash or improperly paid housing expenses—can reduce or eliminate SSI or Medicaid. Legal guidance prevent mismanagement in these sensitive situations. Always consult counsel before making any distribution that could be counted as income or a resource for benefits purposes.
When in doubt, pause: Trustees should seek legal advice or court approval before paying gray-area expenses. Document your reasoning in contemporaneous notes. A written record of your decision-making process provides crucial protection if your actions are ever questioned.
Trustee Discretion, Documentation, and Best Practices
Trustees have significant discretion in how they administer trust transactions—but that discretion comes with strict fiduciary duties of loyalty, impartiality, and prudence. Good process protects both the trustee and the trust’s integrity.
Interpreting the distribution standard: The trust document determine how much latitude the trustee has. “Sole and absolute discretion” gives broad authority, while “HEMS” limits distributions to health, education, maintenance, and support. When a beneficiary requests $50,000 in 2024 to start a new business, the trustee must analyze whether this fits the standard—a business investment might qualify under “support” if it provides long term financial security, or it might not.
Procedures for expense approvals: Create a clear workflow for deciding, denying, or modifying distribution requests. This might include written request forms from beneficiaries, internal checklists, and periodic review meetings. All trust payments should follow a consistent process. Trustee approval should be documented in writing.
Recordkeeping and proper documentation: Maintain detailed ledgers, save all invoices, keep bank statements, and write explanations for significant trust distributions. This is especially important for large or unusual expenses. If a beneficiary or co-trustee challenges your decisions in court, contemporaneous records are your best defense.
Working with professionals: Engage CPAs for tax preparation, attorneys for legal questions, and investment advisors for portfolio management. Paying for this professional advice from the trust is appropriate when it directly relates to trust administration. The cost of legal compliance is a legitimate trust expense.
Proactive communication: Provide periodic reports to beneficiaries so they understand financial support available through the trust and what’s off-limits. Consider giving new beneficiaries a simple “permitted/prohibited expenses” summary when they begin receiving benefits. Transparency reduces conflicts and helps beneficiaries act responsibly with their expectations.
Comparison to Revocable Trusts
When considering trust options, it’s important to understand the differences between revocable and irrevocable trusts. A revocable trust allows the grantor to retain control over trust assets and make changes or dissolve the trust at any time. In contrast, an irrevocable trust offers greater protection for trust assets, as its terms cannot be easily altered once established. This added protection can also provide tax benefits and shield assets from certain creditors.
However, irrevocable trusts are less flexible and require careful planning to ensure they meet your goals. For example, while both types of trusts can be used to pay beneficiary expenses such as medical and health costs, education expenses, and living expenses, an irrevocable trust provides a higher level of security for these distributions. In some cases, a revocable trust may become irrevocable upon the grantor’s death or by choice during the grantor’s lifetime, at which point the rules for paying beneficiary expenses become more restrictive.
Choosing between a revocable and an irrevocable trust depends on your specific needs for asset protection, tax planning, and the types of expenses you want the trust to cover. Understanding these differences is crucial to ensuring your trust assets are managed in a way that best supports your beneficiaries’ health costs, education, and living expenses, both now and in the future.
Estate Planning Considerations
Establishing an irrevocable trust involves more than just transferring assets—it requires thoughtful estate planning to ensure the trust meets your long-term objectives. One of the most important considerations is how the trust will handle beneficiary expenses, income taxes, and the potential impact on government benefits.
The trust document should clearly outline which expenses the trust can pay, including medical and health costs such as health insurance premiums, co-pays, and prescription medications. Education expenses, like tuition and registration fees, are also commonly covered, as are housing expenses, auto insurance, and maintenance costs for trust-owned property. By specifying these allowable expenses, you help ensure the trust is used as intended and that beneficiaries receive the support they need.
It’s also essential to consider how trust distributions might affect a beneficiary’s eligibility for government benefits, such as Medicaid or SSI. Improperly structured payments could jeopardize access to these programs. Additionally, the trust must comply with income tax rules, which can affect both the trust and its beneficiaries.
Appointing a responsible trustee is critical. The trustee must act responsibly, making decisions that align with the grantor’s intent and the trust’s terms. Proper management and documentation of trust transactions help protect both the trustee and the beneficiaries, ensuring the trust remains a reliable source of financial support.
When to Get Legal Advice About Irrevocable Trust Expenses
Missteps with irrevocable trust expenses are difficult to unwind. Early legal guidance from an estate planning attorney or elder law specialist can prevent costly errors with lasting consequences.
Consult an attorney in these situations:
Before paying any long-term care costs from a Medicaid planning trust
When considering large or unusual discretionary distributions in 2024 or later
When the trust is being audited by the IRS or questioned by a state Medicaid agency
If beneficiaries dispute how trust funds are being used
When the trust document is ambiguous about whether certain expenses are permitted
Before making any payment that might impact government benefits for a beneficiary
A qualified attorney can review the trust agreement, applicable state law, and tax implications to produce a written expense policy tailored to your specific trust. This document becomes a roadmap for the trustee and provides protection against future challenges.
Come prepared to your legal consultation: Bring the signed trust document (noting the date it was executed), recent account statements, correspondence from tax or benefits agencies, and a list of specific expenses you’re uncertain about. Tailored advice requires concrete information.
Key takeaways trusts: While irrevocable trusts are designed to restrict changes, they can be administered flexibly and effectively when expenses are chosen carefully and documented properly. The restrictions exist to achieve important goals—tax exemptions, asset protection, or benefits preservation—not to make life difficult. With the right guidance, a properly managed trust provides financial security for beneficiaries while honoring the grantor’s intentions for generations.
Conclusion and Next Steps
Irrevocable trusts are complex but powerful tools for protecting assets and providing financial security for your loved ones. Understanding what expenses can be paid from an irrevocable trust—and ensuring those payments are properly documented and authorized—is essential to preserving the trust’s benefits and avoiding costly mistakes.
If you are considering creating an irrevocable trust or are responsible for managing one, your next step should be to review the trust document carefully and consult with an experienced estate planning attorney. Legal guidance can help you navigate the rules around allowable expenses, tax implications, and government benefits, ensuring the trust is structured and administered in the best interests of all parties.
By taking a proactive approach and seeking professional advice, you can ensure your irrevocable trust is a well-managed, effective vehicle for supporting your beneficiaries and honoring your long-term estate planning goals.