"Martha Matthews, EA" <mtsm1v[at]earthlink.net> wrote:
- quote -

Depending on the specific situation, it may be possible to
create the trust in such a way that it is in effect a
grantor trust, with the income taxed to the beneficiary
irrespective of what the other terms of the trust are. So I
don't see why it couldn't also be a special needs trust.

This would be the situation, for example, with a Crummey
insurance trust.

Stu

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- quote -

I suggest you also check with your state law on special
needs trust. It may limit distributions, even "virtual"
ones. It could also blow the limit on income to qualify for
govt services. Best find an attorney who does a lot of
special needs trusts and a tax pro who understands them as
well.

Martha Matthews, EA

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- quote -

Trusts must follow the terms of the trust instrument in
distributing income. If the trust requires ALL income to be
distributed then it's a simple trust; all income is taxed to
the beneficiary and the gains are taxed to the trust.

If the trust says the trustee has discretion when making
distributions, then it's possible that the beneficiary is
taxed with some of the income and the trust is taxed with
some of the income. The trust is taxed with all of the
gain.

Talk to a tax pro who has experience doing trust tax
returns; they aren't as easy as the instructions make them
out to be.

Linda

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Gumbee1009[at]aol.com (Cynthia) wrote:

- quote -

Cynthia: Get a form 1041 and its instructions from forms
website www.irs.gov which will tell you all this, and more.
Trusts recognize the same low tax rates (5% and 15%) on
qualified dividends and LTCGs as on a 1040. Trusts are
taxed on everything they retain after distributing items of
income ( and gain) to beneficiaries on a K-1. Usually,
because of the steep ordinary tax curve of trusts, they
distribute virtually all their ordinary income. They
usually retain LTCGs either due to trust declaration or
state law or simple choice of the trustee. IF you have a
low income beneficiary that doesn't currently need all the
trust income, instead of accumulating it at the trust's high
bracket the trustee can distribute it (in the 1041 terms it
is "credited" ) on a K-1 to be taxed at the beneficiaries'
rates, but don't actually distribute the money. If it is a
Simple Trust, you're required to distribute all the ordinary
income anyway, and get a bigger exemption. Short term gains
are taxed the same as ordinary income, as are Schedule E
items. Capital losses cannot be distributed until the trus
is liquidated.

ed

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Hi there and thanks in advance for your help.

For an ongoing trust, in this case, a Special Needs Trust, I
am trying to understand the tax implications of income and
how that might guide distributions to reduce taxes. I
realize that there are many rules around distributions in a
SNT (especially as it relates to SSI and the gov't) and am
not specifically looking for information about those rules
and limitations.

Is there a difference in tax rates between
interest/dividend/other passive income and long term (LT)
capital gains in a trust? I know that trusts hit the max
tax rate at slightly less than 10k in income....is this all
income, or just the interest/dividend part?

Bottom line.....are LT capital gains treated preferentially
in trusts, in this case, a SNT, as they are when they are
captured in an individual's income? Do LT capital gains get
the same 15% rate in trusts as they do in a person's
individual 1040, or is all income treated the same?

I know next to nothing about taxes and trusts. Obviously.

Thank you for your help,

Cynthia

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