A Guide To Understanding Your Responsibilities As A Trustee For A Special Needs Trust At Tax Time

11 November 2016
 Categories: , Blog

If you have been designated by a friend or loved one to act as a trustee for a trust that has been established for a special needs person, it is important to know that your responsibilities will be both significant and specific. For instance, you may be surprised to discover that while a tax return for the trust of a special needs individual can typically be filed just as a personal tax return would be, the dollar amount of exemptions for the affected person can vary a great deal, depending on what type of trust it is. In addition, it is fairly common for a special needs grantor trust to require a separate tax identification number in order to facilitate the necessary tax filing. If as little as a dollar has been earned by that type of trust during the year in question, you will need to file a return declaring that income, which is quite different from the majority of personal tax returns. If you need to be a bit less confused about filing taxes as a trustee for a special needs account,the following information will be quite useful.

Understanding How The Choice Of Trust Can Impact Certain Deductions

It is crucial to be sure of what type of trust has been established. If it is within your power to impact the choice of trust, it is a good idea to be aware of how the type of trust can impact certain deductions that could be benefiting the person in question for the rest of his or her life. For instance, if a trust has been designated as a qualified disability trust and has met all of the requirements for doing so, it is permitted one deduction equivalent to the personal exemption granted to an individual for that year.

Given that in 2015, that amount was $4000, that consideration can be significant. In comparison, recent reports mentioned that as lately as 2013, a complex trust was only allowed a $100 exemption. Since special needs trusts often allow persons access to valuable programs like Medicaid or Medicare that they would not otherwise be eligible for, maintaining a specific income is crucial for many people.

When Taxes Must Be Filed

The complexities of tax law make filing taxes for a special needs trust quite challenging in many instances. As was mentioned previously, if even a dollar was earned or provided to the trust during the year being filed for, you will need to explain that by filing a tax return. You should expect to receive appropriate documentation from the bank where the trust is held in order to do so.

In addition, if the person benefiting from the trust needed specific items during that year, such as medical equipment or a modified vehicle to meet his or her specific needs, and the money to do so came from the trust, it is important to understand that the government will consider that as income. When that happens, you will need to have the receipts for each of those purpose,s and it will read on the tax forms as if you had handed the person that much money in cash or transferred it to their bank account for personal use. Therefore, you should expect to pay taxes from the available funds in the account, on the total dollar amount of those financial transactions.

A final consideration will be that for future tax filings, it may be possible to deduct the depreciation of certain items, so be sure to check with your tax expert about the best ways to do so in the future. In some instances, depreciating certain allowable expenses over multiple years may offset part of a future tax burden.

In conclusion, the use of a special needs trust can often allow an afflicted person to maintain eligibility for certain governmental programs, including Medicare, Medicaid, etc. As the trustee for that account, your role is crucial, and tax time may produce additional challenges. As a result, it is a good idea to be aware of the pertinent information provided above. For more information, talk to a tax service that specializes in trust tax returns.