@Have it all wrote:
Hello,
I am curious if anyone has had experience in the tax treatment of distributions from a special needs trust to an ABLE account. Specifically, where does the tax liability flow for the capital gains and qualified dividends? If the tax liability does flow to the ABLE account (as it would flow to the beneficiary if the funds were disbursed to the him/her), is there no tax liability (as normal gains in the account)?
You really should retain the services of a special needs planning professional as this is a specialty and is vitally important to preserve eligibility for means-tested programs. The slightest error, if made, has the potential to destroy (sometimes permanently) qualifications necessary to receive government benefits.
Further, you should be aware that contributions to ABLE accounts are limited, both on an annual basis and in total ($15k annually with a $100k cap) and these amounts can change. Regardless, the ABLE account is not taxed for receiving contributions.
Generally, the trust or the beneficiary will be taxed on any income or gains during the tax year. Typically, a non-grantor trust retains capital gains (as corpus) and pays tax on those gains while the income is distributed to the beneficiary who, in turn, reports that income on his/her individual income tax return.
However, trusts can be written in myriad different ways so the typical taxation schema (above) can vary significantly, particularly with respect to SNTs (since they can be first-party or third-party and the latter can also possibly claim QDist treatment).
Again, professional guidance is critical in this scenario.
