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 There may be some taxable income to your wife for the year the funds are withdrawn, but that should not be a large sum.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.
