Typically, a special needs trust is set up for someone who has certain disabilities that allows him or her to receive government benefits. To qualify for many of these benefits your net worth and income levels must remain below specified thresholds. To allow someone to own additional assets, those assets need to be placed in a special needs trust (SNT) with a trustee managing the assets for benefit of the special needs beneficiary.
An SNT can be a first party SNT which means the trust is funded with the assets owned by the disabled person. An SNT can also be funded by someone else’s assets, making it a third party SNT. This distinction is important at tax time since the two types of SNTs are treated differently for tax purposes.
First Party SNT
A first party SNT is generally classified as a grantor trust which means that all of the income, deductions and credits should be reflected on the personal income tax return of the beneficiary with the disability. There are two ways to go about filing the taxes:
Option 1: The trustee obtains a separate taxpayer identification number (TIN) when the SNT is established. Each year the trustee of a first party SNT files an informational 1041 and attaches a Grantor Trust Information Letter.
Option 2: The trustee does not obtain a separate TIN, but uses the beneficiary’s Social Security number. Financial institutions file form 1099s and therefore an informational 1041 is not needed.
Third Party SNT
A third party SNT is categorized as a complex trust and therefore a separate legal entity for tax reporting purposes. The SNT itself must file a return, also on Form 1041, to report income, deductions and credits.
In order for the 1041 form to be required, one of the following must exist:
- The SNT had taxable income (any amount);
- The SNT had gross income of $600 or more;
- The SNT has a beneficiary who is a non-resident alien.
The filing deadline for special needs trusts is the same as the personal filing deadline – April 15th of each year. It is wise for a trustee to hire an experienced tax preparer or an attorney who specializes in fiduciary income taxation to complete the annual forms. The forms themselves, as well as the allowed deductions, are very different from personal tax returns.
If you need to set up a special needs trust or are serving as the trustee for an SNT, contact the experienced estate planning attorneys at Stouffer Legal in the Greater Baltimore area for a consultation. You can schedule an appointment by calling us at (443) 470-3599 or emailing us at office@stoufferlegal.com.
