AccountingBLOCK - Tax and Accounting Forums

I have a client who is a SNT and that is not a problem except the beneficiary died in early July and her "normal" brother became the beneficiary.

There is a house that is now rented out and the type of trust changed from a qualifed Beneficary trust to just a complex trust.

I am not sure the best way to handle this and would appreciate any thoughts.

Should I do two part year tax returns, one until death and then a second for the balance of the year? Can you do that? Or just change to complex trust and allocate what I can to brother?

Or????

Thanks in advance for any help.

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Joseph R. Tone
Certified Public Accountant

Are you sure that is a special needs trust?

The function of a special needs trust generally is to allow a disabled person to have assets to meet the needs not usually covered by government programs. The terms of the SNT allow the beneficiary to have assets normally kicking out benefits, yet still receive the benefits.

At the passing of the beneficiary, the government agents potentially have a claim on trust assets.

Whether there is anything remaining for the survivors is dependent on the existence and amount of that claim.

This is a highly specialized area involving specialized legal knowledge.

Thanks for the response.

Yes, I am sure it is a SNT. She was a disabled person and the trust allowed her to continue to get benefits and etc. The trust was established from her Parent's will and said that upon her death, the
assets go to her brother. He got the stocks and like already but there was a house that She lived in and that is now rented to a unrelated person. The brother will get the remaining assets when we distribute
this year. However, for the period from date of death, July 2, 2008 until 12/31/08 the house was rented to someone other then the disabled sister and there are other items of income and expenses.

The question, how do I treat them and distribute that to the brother since my understanding is that it ceases to be a SNT on her death.

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Joseph R. Tone
Certified Public Accountant

Since the trust was funded by the parents, it's not self-funded so I assume that it has been filing a Form 1041 all along.

I'm not a trust expert, but I think SNT status is a legal distinction and not a tax distinction.

Since it has been filing 1041's, wouldn't that have been as a complex trust? There is a change in beneficiary now but the trust continues to exist, so two K-1's from the same 1041? Unfortunately I don't do many trust returns, but I do have one client with a self-funded SNT that does not file a separate tax return.

Will the government give the benefits to the brother?or it will be eliminated as the true beneficiary died.

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accountant in Droitwich / tyre changers / playmobil / castors / warhammer tau

"Special Needs Trust" is not a trust nor tax term.

"SNT" is a marketing term. So-called "Medicare trusts" are designed to distribute funds
to beneficiary(ies) in amounts not exceeding benefit recipient qualification levels. The SNT
trusts are, in terms of Equity, spendthrift and/or discretionary trusts.

Trustees are authorized, nay, directed to distribute income or principal in accordance with
a schedule to protect the "SNT" beneficiaries rights to government welfare.

If the trust is irrevocable, the 1041 status began at time of trust's declaration. Why the inquiry relating to
two tax returns?

"At the passing of the beneficiary, the government agents potentially have a claim on trust assets."
The trust is designed to terminate? Describe the termination clause. Trust names beneficial interest
remaindermen (remainder cestui)?

I'll revise above post after work today.

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KateEA Inquires: "Are you sure that is a special needs trust?"

"There is some confusion in the disability community about the terms to use for a
third-party established trust [emphasis added] created to provide resources to
supplement governmental benefits, such as Supplemental Security Income (SSI) and
Medicaid. Many use the term "special needs trust." This may cause some confusion,
because the federal government has used that term to mean a "self-settled" trust,
that is, using the beneficiary's own resources to establish the trust [grantor trust]."
http://www.paulnidich.com/id20.htm

Response based upon limited information regarding trust instrument's terms
disclosed by poster. In light of the quasifiduciary responsibility of a trustee's accountant,
information dissemination limitation understood.

Trust taxation 101: Trusts fall into 2 categories, grantor or nongrantor.
If grantor trust classification - (IRC §671-678) include income in individual return, similar to Single Member
LLC (SMLLC), without use of Schedule C. If separate entity classification, file form 1041 and distribute K-1 to
beneficiary(ies) receiving "income"* from trust, in capacity of beneficiary, 1099 to persons receiving non beneficiary
distributions.

Your question, if I may rephrase:
Trust was a grantor trust until death of beneficiary resulted in trust's classification as separate entity. I am
contemplating filing two 1041s in 2009 reporting income and distributions to deceased beneficiary and subsequent remainder
beneficiary. Comments?

A: "No", Deceased's estate reports 2009 income from grantor trust, 1041 for subsequent trust
distributions to remainderman (brother), apply for trust TIN via IRS Form SS-4

Or
Trust was a "1041 filer" (nongrantor trust) with a trust TIN (clue**). I am contemplating filing two 1041s in 2009 reporting income
and distributions to deceased beneficiary and subsequent remainder beneficiary. Comments?

A: "No", File single 1041 with attached 1041 K-1's:
K-1 deceased beneficiary or beneficiary's estate (probate quirk, separate union rules, consult probate administrator (if any))
K-1 alternate party(ies) receiving trust distribution (i.e., "normal brother", properly denoted remainderman)

*Similar to partnership taxation, trust distribution may be income, principal or a
combination thereof. Exclude distributions of capital from K-1 income reporting
** Exception to rule, grantor trusts may receive TINs for "information returns only".

Cerebral Inquiry Alert *** Nomination: Most Difficult Question of Month ***

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KateEA:
"At the passing of the beneficiary, the government agents potentially have a claim
on trust assets."

Medicare trust qualifications in 1997-99 (Clinton) created criminal and civil sanctions for
trusts (so-called "Medicare Qualification Trusts") created to divert ownership of property of:
rights to income, ownership, or rights to ownership into trusts to qualify for government
assistance while retaining property in trust for welfare recipient and/or heirs to avoid
government qualification rules.

Produce the government's claim, ref.: Restatement of Torts 3rd ed, Burden of Proof

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