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Tax Implications for First Party Special Needs (Grantor) Trust

A self-settled, first party special needs trust was recently established for my child with their assets. My spouse and I serve as trustees.

 

For any non-distributed capital gains or income/dividends earned by invested assets in the trust, how are taxes handled? My understanding is this is considered a grantor trust according to the Internal Revenue Code Title 26 §§671-4 (https://www.irs.gov/pub/irs-tege/eotopicf01.pdf; https://www.law.cornell.edu/uscode/text ... /subpart-E).

 

So would any income or gains from the trust be filed on a Form 1040 for my child? How do taxes on capital gains work for grantor trusts?

 

Any expert insight would be greatly appreciated as we plan ahead.

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Accepted Solutions

Tax Implications for First Party Special Needs (Grantor) Trust


@Michael16 wrote:

How do taxes on capital gains work for grantor trusts?


Grantor trusts are not separate, pass-through, entities (that generate K-1s). As such, the income, expenses, deductions, credits, et al, are reported on the individual's personal income tax return (1040). 

 

Regardless, you should really consult with a local tax professional for this scenario.

 

See https://taxexperts.naea.org/expertdirectory

 

 

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2 Replies

Tax Implications for First Party Special Needs (Grantor) Trust


@Michael16 wrote:

How do taxes on capital gains work for grantor trusts?


Grantor trusts are not separate, pass-through, entities (that generate K-1s). As such, the income, expenses, deductions, credits, et al, are reported on the individual's personal income tax return (1040). 

 

Regardless, you should really consult with a local tax professional for this scenario.

 

See https://taxexperts.naea.org/expertdirectory

 

 

Tax Implications for First Party Special Needs (Grantor) Trust

Note that there are optional methods for filing:

 

See https://www.irs.gov/instructions/i1041#en_US_2023_publink1000286020

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