Income Tax on Special Needs Trust

We are often asked about taxes for a self-settled special needs trust.

Lets assume that the client, Jon, is receiving Medicaid and SSI in Florida. Lets also pretend that Jon is getting a large personal injury settlement.

So, Jon’s personal injury attorney is knowledgeable enough to call a Special Needs Trust (SNT) attorney to meet with Jon and explain why he needs a SNT. Jon establishes the self settled trust and enjoys the benefits of his settlement without losing his Medicaid or SSI.

The self-settled special needs trust has another name: it is also a “grantor” trust. That term really only has meaning for U.S. federal income tax purposes, but that’s a pretty important purpose and so the term is pervasive.

What does that mean for income tax purposes? Two important things:

  1. Jon’s trust will never pay a separate income tax (well, at least not as long as he is alive). The trust’s income will always be taxable on her personal, individual, non-trust tax return.

  2. Jon’s trust will also never need to file a separate income tax return. In fact, it will never be allowed to file a separate income tax return.

There is a lot of confusion about Jon’s special needs trust. Does it need to get its own taxpayer identification number (EIN) No. Then why do accountants, bankers, brokers, even lawyers keep telling you that it does? Because they are wrong, that’s why. Many of them believe that any time a trust has a trustee who is not also a beneficiary the trust must get an EIN. That is not correct.

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(786) 463-4463

North Miami Beach, Florida