Tax Season – How to File a Tax Return for a Special Needs Trust

March 6, 2020

We have written about the differences between a first-party special needs trust and a third-party special needs trust recently. With tax season upon us, we wanted to add more information pertaining to the differences in tax return requirements.

To recap, a first-party SNT is funded with assets belonging to the disabled individual while a third-party SNT is funded with assets from others (usually parents or relatives). So how is the income from these different types of SNTs reported to the IRS?

First-party SNTs are classified as grantor trusts which means that all income, deductions and credits should be entered on the personal income tax return of the disabled individual.

Third-party SNTs are classified as qualified disability trusts for income tax purposes. Form 1041 is the U.S. Income Tax Return for Estates and Trusts. Trustees of third-party SNTs will use this form to report the trust’s income. It is due on April 15 of the year following the year the income was received. Maryland also requires filing state income tax returns for the SNTs.

Given the complexity of Form 1041, it is recommended that trustees consult with an experienced tax preparer or attorney who specializes in fiduciary income taxation and special needs trusts. For more information, contact Stouffer Legal at 443-470-3599 in the Greater Baltimore area.

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