Special Needs Trust Grantor Tax Liability?

[SteveJ57]

My oldest son (26) is challenged by mental health issues (he's doing okay right now). His grandmother gave him $50k as a gift, and at the time, we set up a brokerage account with my wife as a signer (he can't get the money without her sign-off, but he hasn't tried anyway). He does not make enough money to pay all his bills, and has managed to get into subsidized housing in Virginia, but to get the subsidy these funds need to be put into a Special Needs Trust that he cannot access. We've already set up the trust, but we need to move the funds from the brokerage to the SNT. Questions:

1. When setting up the SNT account, who is the grantor? My wife (who is working to set it up) is listed in the trust as the Settlor and Trustee. There's no mention of "Grantor."
2. If yes, will her SSN suffice or do we need to get a TIN? These are the only two choices at Fidelity for the Grantor.
3. If she is the grantor and uses her SSN to set up the Trust Account, will this affect our taxes at all? The account is taxable, and will be invested and (hopefully) growing through re-invested interest and dividends.

[tagteam]

You need to consult local legal counsel in order to get the trust established properly.

See https://www.avvo.com/estate-planning-lawyer.html

Most likely you want the trust to be a qualified disability trust (QDisT).

[SteveJ57]

Thanks for your message. The Special Needs Trust itself is already a legal entity established with the assistance of an estate attorney. That's a done deal. My questions are about setting up a trust *account* to fund it, and if funding it will create a taxable event for us (vs. for the trust). Sorry if that was not clear. 

I didn't realize this was posted in Business & Farm. Probably not the right place for it. Is it frowned upon to re-post it in a more appropriate forum category?

[DaveF1006]

It depends. First of all, your wife may be the grantor since she is the creator of the Trust. As the name suggests, a Grantor “grants” assets or property to a Grantee (beneficiary - the person or entity receiving the assets. Your son would be considered the beneficiary in this case.

As far as using an SSN or TIN, it depends on the type of trust whether it is established as a revocable or irrevocable trust. If the trust is irrevocable, it needs to have its own TIN. If it is revocable, then your wife may use her own Social Security Number as she can make changes to the trust once it is in force. You may ask your estate attorney if the trust he/she set up is revocable or irrevocable. 

Now for the most important part of your question. If you add your own assets to the account, this is considered a gift thus you would need to file a gift tax return if the gift is over $17,000. Since a gift tax return is filed individually and not jointly, you may contribute up to $34,000 between the two of you and you will not have a Gift Tax reporting requirement.

If the trust is set up as a separate entity with its own EIN, it will be responsible for paying the tax and then passed on the the beneficiary. The beneficiary (your son) will be responsible for paying the taxes and be issued the K1 to report on his tax return.

If it is a revocable trust or grantor trust (same thing), your wife will be responsible for the payment of taxes to be reported on your individual joint  tax return. 

@SteveJ57 

[SteveJ57]

Dave, thanks very much for your message. All the money that is going into the Fidelity SNT account are funds that already belong to our son, but are held at a different firm. So we are not contributing anything to it, just setting it up and moving the funds. So, no taxable event for us, if I'm reading you right.

It is a revocable trust, so my wife will use her SSN to set up the account as you suggest. Our son has ~$50k in a brokerage account, and another ~$6k in a Roth IRA. Since investments at the other firm need to be liquidated to move them, I'm assuming that will create a taxable event for him in the year they are liquidated--capital gains on the brokerage account earnings (divs & interest), plus 10% early withdrawal penalty and capital gains on the liquidated Roth earnings. Is that correct?

So, another question, if you are willing to offer more: who files taxes on the gains (divs & interest) in the SNT when they occur? I'm hoping not the grantor/trustee (us--we file jointly), because it's not our money/gains and it would throw a monkey wrench into our tax situation. A separate return for the SNT? 

[DaveF1006]

Please read this article regarding third party SNT. Since this is set up as a Grantor Trust (Revocable Trust), "all items of income, deduction and credit are generally taxed to the individual(s) who created and funded the SNT (typically parents or other relatives of the beneficiary with a disability)". In this case, your wife may not have funded the trust but she did create it".

There is no gift tax return requirement for you if you do not contribute to the trust.  

[tagteam]

---

@SteveJ57 wrote:

So, another question, if you are willing to offer more: who files taxes on the gains (divs & interest) in the SNT when they occur? I'm hoping not the grantor/trustee (us--we file jointly), because it's not our money/gains and it would throw a monkey wrench into our tax situation. A separate return for the SNT? 

---

If the trust is revocable and you have used your wife's SSN on the account(s), then the trust is essentially treated as a disregarded entity and, yes, the grantors (you and your wife, ostensibly) would report and have income tax liability on any income and/or gain. 

I previously asked you if this was a QDisT and that's important for a few reasons, particularly the fact that these trusts get their own tax exemption ($4,700 in 2023).

See https://www.specialneedsalliance.org/wp-content/uploads/2016/04/Qualified-Disability-Trust.pdf

You might want to discuss this with legal counsel and a local tax professional.

@SteveJ57 

[SteveJ57]

@tagteam Thanks for your response. It's all a bit confusing, but I believe the SNT we established is not a QDisT. Just a simple trust. I skimmed the document you referred (I will study it more closely later on, and we will also consult a tax pro). The main point that stands out in the document for me is that our son is not disabled per §1614(a)(3) of the Social Security Act, 42 U.S.C. 1382c (a)(3)). He is healthy and able to work when he is sticking with treatment, and he doesn't receive, nor has he applied for, SSI or SSDI. 

We will be getting a TIN/EIN for the Trust account so that we can separate its earnings from our own.

[tagteam]

---

@SteveJ57 wrote:

We will be getting a TIN/EIN for the Trust account so that we can separate its earnings from our own.

---

That is fine, except you probably need to consult with your attorney because if the trust is a grantor trust, the grantor will be responsible for paying tax on any income the trust earns.

A QDisT is advantageous because that type of trust gets a rather large exemption, but that becomes immaterial if the disabled party is not qualified.