Special Needs Trust

[GTS1101]

I have a disabled client who is the daughter of a client that passed way in 2008. She has attorney but is getting nowhere with him. Her health is starting to be affected by all the stress of the taxes and I wanted to help her. I don't know a whole lot about trusts as I am just starting to learn about them in the last year.

Shortly after her mom passed she received several 1099-R's with distribution code 4 for death benefit and the taxable amounts total up to approx 146,000. They all came in her name and her social security number. She said that she kept 10,000 of this money to pay off a family member that her mom owed the money to. The rest of the money she said was put into her special needs trust. She is saying that because the money was put into her special needs trust she does not think she is required to file a tax return for federal or state. I told her I did not know enough about trusts to answer her question. Anyone know about special needs trust? I would assume she has to file and report the income. No federal or state income tax was withheld. Should I just recommend she find another attorney? She is also afraid of losing her medicad or medical benefits because of this money.

Thanks!
GTS1101

[DaveO]

I'm far from expert in special needs trust. My understanding of the trust is that it is set up in such a way that the eligibility of the Beneficiary for benefits is not reduced. For that reason the Trustee and the Beneficiary is not the same person. As far as taxation goes I don’t think there is any difference between a special needs and any other trust. The fact that the trust doesn’t distribute all the income out and take the deduction can cause the trust to have a tax bill. I used to do one that was set up to pay for college. Each year the trust would have a tax bill since t made no distributions. When the kid started going to school I suggested that he take the distributions as income since his rates would be lower but the trustee would have none of that.

I hope members with more experience will chime in.

[appelman]

The 1099-R's could have been misdirected...

if the money was supposed to go into the trust, which, I presume, is an irrevocable non-grantor trust and has it's own EIN. You may want to get hold of the trust document, and, if necessary, contact the payers. It could simply be that no one ever told them about the trust.

[Burke]

I have a disabled client who is the daughter of a client that passed way in 2008. She has attorney but is getting nowhere with him. Her health is starting to be affected by all the stress of the taxes and I wanted to help her. I don't know a whole lot about trusts as I am just starting to learn about them in the last year.

Shortly after her mom passed she received several 1099-R's with distribution code 4 for death benefit and the taxable amounts total up to approx 146,000. They all came in her name and her social security number. She said that she kept 10,000 of this money to pay off a family member that her mom owed the money to. The rest of the money she said was put into her special needs trust. She is saying that because the money was put into her special needs trust she does not think she is required to file a tax return for federal or state. I told her I did not know enough about trusts to answer her question. Anyone know about special needs trust? I would assume she has to file and report the income. No federal or state income tax was withheld. Should I just recommend she find another attorney? She is also afraid of losing her medicad or medical benefits because of this money.Thanks!GTS1101

A special needs trust is set up to protect the assets of a (disabled) person and to provide them income depending on the terms of the trust. There is a trust document somewhere that governs all this. There should be a separate EIN for the trust. There are a number of unanswered questions here. Was the trust set up by the mother before she died? Who is the trustee? Did the will direct that assets go into the trust for the daughter after the estate was settled? It appears that even if this were so, the vehicles that generated the 1099R's (whatever they were -- IRA, 401k, other) named this daughter as beneficiary directly and not the estate and/or trust. Therefore, she got the money and unless she disclaimed it, it's going to be taxed to her. If there is an attorney involved, it concerns me that "she is getting nowhere with him." In what regard? Is he handling the mother's estate? There are governing authorities who can intercede if there is a real problem here, but it may be just lack of communication. If you feel close enough to this client, you might volunteer to go with her to meet with the attorney. Although the monies may be in a special needs trust now, it does not appear the proper steps were taken to avoid her receiving these funds. If that is the case, she will be taxed on it up front. She needs to have a real heart-to-heart with her lawyer. As far as the trust taxes, a return will have to be filed each year it is in existence. Form 1041.

[JON]

I agree

with the previous. You have to find out specifics, but on the face of it she should/would have to pay the income taxes on the distributions. Special needs trust are set up to allow for additional funds to get to the person without disquailifying the person from government aid.The trust can be set up by the special needs person, but on first blush she has a tax problem first, income second-which may cause a problem with any government aid she is receiving. Good luck...

[GTS1101]

Thank You!

Thank You! I appreciate the in depth response and explanation. That gives me a lot to think about which direction to go into helping this client. She cannot even get a hold of her attorney because he won't return or her calls or emails. I am going to suggest another attorney. Thank You again! Your wisdom is greatly appreciated.

GTS1101

[TaxLadyinPA]

I agree for new Attorney

There are Attornies who specialize in Trusts. Guide her in that direction. Like us preparers ... some specialize and some don't. Look in the yellow pages and ask around. Word of mouth is sometimes your best recommendation.

I would be worried too that she is *screwed* with this coming in her name and SSN and not the trust.

Her medical and other government benefits may be in big jeopardy.

If this is taken care of quickly ... maybe they can re-issue the 1099-R to the Trust.
I wouldn't do her taxes yet until she seeks the advice of a new *Trust* Attorney.

I wish her all the best in straightening this out.

[Burke]

Thank You! I appreciate the in depth response and explanation. That gives me a lot to think about which direction to go into helping this client. She cannot even get a hold of her attorney because he won't return or her calls or emails. I am going to suggest another attorney. Thank You again! Your wisdom is greatly appreciated.GTS1101

Well, it is still a little unclear exactly what this attorney is supposed to be doing. If he was supposed to draft a trust document and there is not currently one, then how could she have put monies into a trust that does not exist yet? Just obtaining a trust EIN does not make a trust. If she has officially retained this attorney to handle the estate and/or a trust for her, and he won't return her calls or emails, then I would pursue this with his local bar association.