Coverage requirements for trusts
When a trust hires employees, it is treated like any other employer for workers' compensation purposes. The trust must obtain a policy from the state's workers' compensation fund or a private insurer, unless the state exempts certain nonprofit or small‑scale trusts. Coverage is mandatory if the trust pays wages above the state's minimum threshold, and the policy must name the trust as the insured entity.
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Determining who the employer is
Legal ownership of the employee relationship rests with the trustee(s) acting on behalf of the trust. The trustee files the workers' compensation application, pays premiums, and handles claims. Beneficiaries do not become liable unless they assume trustee duties or personally employ staff.
Filing a claim
Employees report injuries to the trustee or designated claims manager, who then notifies the insurer and completes the state claim form. The process mirrors that of a corporation: medical treatment is authorized, wage replacement is calculated based on the employee's average weekly wage, and the trust's insurance carrier pays benefits directly.
Tax and financial considerations
Premiums paid by a trust are generally deductible as a business expense on the trust's tax return (Form 1041). However, if the trust is a grantor trust, the grantor may claim the deduction on their personal return. Workers' compensation benefits are typically tax‑free for the injured employee, but they can affect the trust's overall financial planning, especially if the trust's assets are used to cover large settlements.
Special scenarios
Charitable trusts that employ staff for program delivery often qualify for reduced rates or exemptions, depending on state law. Family trusts that hire household employees must still comply with workers' compensation rules, though some states allow a "family employee" exemption for caregivers.
Comparing trust types
| Trust type | Typical employer status | Workers' comp obligation |
|---|---|---|
| Grantor trust | Taxed to grantor | Premiums deductible by grantor; policy required if wages exceed threshold |
| Irrevocable charitable trust | Separate legal entity | May qualify for exemptions or lower rates; must still maintain coverage for paid staff |
| Family trust | Often informal | Standard coverage required unless state exempts family employees |
Key steps for trustees
- Verify state-specific workers' compensation requirements for trusts.
- Secure a policy that lists the trust as the insured party.
- Maintain accurate payroll records to calculate premiums.
- Designate a claims manager to handle injury reports promptly.
- Consult a tax professional to optimize deductions and compliance.