Funding ABLE Account from Special Needs Trust (SNT) - Tax Implications

[Michael16]

I am the trustee for a first party special needs trust (SNT). I'm interested in directly funding the beneficiary's ABLE (Achieving a Better Life Experience) account using the SNT. The trust language allows for distributions that will be treated as a contribution to the beneficiary's ABLE account (i.e., this is allowed in the trust).

I believe any funds contributed to the ABLE account are not considered income to the beneficiary for means-tested government benefits (see: https://www.medicaid.gov/federal-policy-guidance/downloads/smd17002.pdf). So if the trust makes an $18,000 contribution to the beneficiary's ABLE account in a single month (the annual max allowed for the ABLE account), it would not jeopardize means-tested government benefits like SSI and Medicaid.

But how is this distribution handled on the beneficiary's 1041 (i.e., the attached Grantor Trust Information Letter since it is a first-party SNT)? Is the distribution considered income that would then be taxed at the beneficiary's tax rate?

[M-MTax]

Why would this distribution appear on the grantor information statement at all if the trust is only distributing corpus?

[Michael16]

A statement of items taxable to the grantor is attached to the 1041, which includes both income and deductible expenses handled by the trust. I assume an ABLE contribution would be part of the beneficiary's DNI (Distributable Net Income) and therefore get included on the Grantor Trust Information Letter attached to the 1041. Is that correct?

[M-MTax]

That would be correct if there are income and deductions and the distribution is partially net income and partially corpus.

[Michael16]

So only distributions made from trust income/gains (not principal) need to be reported on the Grantor Trust Information Letter attached to the 1041?

Ultimately, I'm needing to know whether an ABLE contribution from the trust is a qualified distribution to the beneficiary. If so, is the ABLE contribution also an applicable deduction for any income generated by the trust?