The beneficiary of a special needs trust is responsible for paying an income tax generated by that trust. The income must be reported by the beneficiary on his or her personal tax return. When constructing the language of the special needs trust, the document should allow the special needs trust to pay the beneficiary's income tax liability from the assets in the special needs trust. This is essential giving that in most situations, a special needs trust beneficiary will not have any other separate assets from which to pay this tax liability.
When a special needs trust is set up where the income is reported by the special needs trust and taxed at that level, the trustee is reponsible for paying the income taxes out of the special needs trust assets.
A trustee should consult with a CPA or experienced estate planning attorney who specializes in fiduciary income taxation,to ensure that all income generated by a special needs trust is reported properly and any qualifying deductions are met. While there are similarities between personal and fiduciary income tax returns, the forms and the available deductions vary greatly.
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