Does a gift trust have a special tax to the beneficiary and does that affect what our listed taxable wages are when it comes to applying for income based benefits?

[abarbato33]

I have a full time career with paid benefits and retirement.  My wife is currently going to school and her grandmother set aside a gift trust for her.  The trust matured in 2016 but we were thinking of liquidating the account for bills.  I don't make a lot and the amount in there 11,500, would greatly help credit cards and medical bills we're behind on.  My daughter gets help with her healthcare through healthnet, and they ask for your income.  We get help because my yearly salary is under a set amount.

If we pulled that money out, would I file them for 2016, since that's when it matured, or 2017 taxes?  Also, are they taxed at a different rate or does that amount get taxed at our income amount? Lastly, does that income count as a taxable wage income, for when we reapply for her health benefits, or is it a separate type of income that we can show was a one time gifted amount?

Just concerned because I want to know if we liquidate the money, how much to keep aside for taxes, and how that will affect my daughters health benefits because of our income.  Can't afford 550 a month extra just for health care costs, so I want to prepare.

[RichardG · Accepted solution]

I'm assuming your wife is the beneficiary of a minor's trust or account, in which case the trust has already paid income taxes on its earnings over the years. As a general rule, distributions from these trusts are not taxable income for the recipient. The distribution does not get reported on your tax return.  There may be some taxable income to your wife for the year the funds are withdrawn, but that should not be a large sum.  In any event, that income won't be reported on your tax return until next year.  

And since the trust money isn't income,it may not be a factor in your daughter's eligibility for medical benefits.  I suggest you contact Healthnet to verify if it will affect her eligibility.

[abarbato33]

Thanks for the reply.  It's actually my wife's trust that her grandmother set up for her.  It matured in December 2015 and she just withdrew the amount, around 11,500 this month and we paid our debts with it.  Since she did withdrew would that be as a taxable income that's reported in 2018 for the 2017 year?

[RichardG]

Yes.  If part of the distribution is taxable income (it's likely to be a small amount), then it's 2017 income that you will report next year when you complete your 2017 tax return (with TurboTax, of course!).

[abarbato33]

Thank you so much! You guys seriously make it so much easier to do my own taxes.