How are distributions defined for a Special Needs Trust?

[GeneE]

I am the trustee for my brother's special needs trust. The trust requires that I cannot distribute funds directly to my brother, but the trust may pay for the delivery of services, equipment, etc. that the government does not provide.

Since I have only been a trustee for a short period, starting with the funding of the trust when both my parents died recently, I am confused by how the IRS defines "distributions" to the beneficiary (my brother). 

Can I assume that "distributions" to the beneficiary are narrowly defined as direct payments to my brother (which have not occurred because the trust forbids it)?

Or, do I have to account for all the purchases made in 2019 by the trust?

[KarenM90 · Accepted solution]

Yes, Yes, and Yes.  IRS generally is referring to distributions of cash when referring to distributions.

As far as a Special Needs Trust, it is RARELY a good idea to distribute cash to the beneficiaries because these trusts are usually formed to assist the Special Needs Individuals without effecting State or Federal Assistance they are receiving.  Distributing Cash can affect those Federal and State Programs.  

Generally, funds from the special needs trust should cover items that are not, or cannot be covered by other Federal and State Programs they might be eligible for, or are already receiving.  Here is a quick list of some of the things that should generally NOT be done with the money from the Trust without consulting an attorney:

• Cash given directly to the beneficiary for any purpose
• Food or groceries
• Restaurant meals (except if given as an occasional gift)
• Rent or mortgage payments
• Property taxes
• Homeowners or condo association dues
• Homeowners insurance if the insurance is a mortgage requirement
• Utilities such as electricity, gas, and water
• Utilities hookup or connection charges

Yes, as a trustee, you need to keep receipts and good bookkeeping records of all expenses, how they were used, etc. 

[GeneE]

Thanks for your answer yesterday. It was short and to the point. Love that. 

However, your answer only appeared in the email I received that notified me of the post. It does not appear on the forum. I'm am fairly new to the TurboTax community. So, I'm not sure why this happened. Can you explain. 

Either way, I appreciate your original answer very much. Thanks!!!

[GeneE]

Thanks Karen. You provide a very through answer. I was glad to see it. Very helpful.

I do have one clarification. You mentioned that property taxes cannot be paid by the trust. I assume you are implying if he owns the property, not the trust? 

[JohnB5677]

 If the trust owns the  real estate, it can pay the tax , and it gets to deduct those taxes.

[andreabest2277]

This is exactly what I was looking for!

Just to confirm - Trust funds used to purchase items for the special needs beneficiary are not reported in TurboTax as a Distribution, Correct?

Are they reported anywhere else, such as a deduction which would reduce the Trust income, and therefore tax liability?