Special Needs Trust Tax Benefits
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FAQ
First-Party or Self-Funded Special Needs Trusts Any income earned on the funds invested in the first-party trust is always taxable to the beneficiary in the year it is earned, regardless of when or if it is distributed to the beneficiary.
It is important to remember that the SNT cannot deduct expenses like rent and food. Deductions can be for medical care, custodial care, support services, and similar care not provided by public benefits programs.
Whether or not you need an EIN for a trust depends on the type of trust. Generally, grantor revocable trusts do not need an EIN. Any income taxes from a revocable trust is reported via the grantor's SSN since the grantor can revoke the trust at any time and regain possession of the property.
The IRS permits trusts to claim a tax deduction for income distributed to beneficiaries, and the beneficiary pays the income tax on the taxable amount rather than the trust. Distributions to beneficiaries come from the current-year income first and then the principal. Distributions from the principal are non-taxable.
A Special Needs Trust must have its own Federal Identification Number (also called an Employer Identification Number, EIN, Tax Identification Number, or TIN) to be valid. This unique number means that the Trust is its own entity, and that it does not belong to anyone but itself.