Special Needs Trust Pitfalls

[Bogie]

Hello, Has anyone had experience with a special needs trust? My brother is special needs and has a trust that he will have for his benefit once my parents pass. He can't receive income from the trust because of disability benefits but I saw the trust tax is almost 40% above about $11,500 of income plus I believe a medicare surcharge of about 4%. I'm trying to find out how to meet his needs without paying so much tax.

Thanks

 

[MichaelB]

Income generated by the special needs trust can be taxed at the beneficiary's tax rate, but this requires careful management and the trust must have been set up with this in mind. A consultation with a tax preparer experienced in these trusts will help, as would checking with the attorney that set up the trust, if possible.

 

[Bogie]

In this case I think the beneficiary would risk losing benefits such as qualified medicare beneficiary (QMB) status since he can only have limited income. The trust is still revocable so I'm trying to think ahead. I'll talk to an accountant about it but I've always done my own taxes and was planning on doing his taxes for him since he's not mentally able to do them himself. I'm currently appointed to be the trustee of his trust. It looks like I may be over my head.

Thanks for the reply.

 

[MichaelB]

In this case I think the beneficiary would risk losing benefits such as qualified medicare beneficiary (QMB) status since he can only have limited income. The trust is still revocable so I'm trying to think ahead. I'll talk to an accountant about it but I've always done my own taxes and was planning on doing his taxes for him since he's not mentally able to do them himself. I'm currently appointed to be the trustee of his trust. It looks like I may be over my head.

Thanks for the reply.

A special needs trust can be set up and funded so that if the earnings are distributed and used for the benefit of the beneficiary, they will be taxed at the beneficiaries tax rate without being considered income to the beneficiary. Just a bit of experience, no expert here, this requires very specific trust language and funding, also very careful record keeping, but if it is still in the revocable stage it is possible. All the earnings need to be distributed, the distributions must be on behalf of the beneficiary and for eligible expenses, such as medical, etc.

There is no reason you cannot do the taxes without help, what you need are the "rules", which should be given to you by the attorney writing the trust, along with the confirmation that it is set up to enable this. I would ask the attorney to specifically confirm this, request the he / she then advise you how to carry out the distributions to ensure they are compliant, and finally ask how the tax return should be prepared.

 

[Bogie]

Great advice. I'll schedule a meeting with the atty.