The Trustee of a special needs trust will likely have to file an income tax return every year for the trust. Trusts generally are considered separate taxable entities for income tax purposes; however the forms and requirements will depend on the type of trust created.
Most special needs trusts will fall under the tax classification of “grantor trust.” These trusts are created for those benefiting from government programs such as Supplemental Security Income or Medicaid. All of the income, deductions and credits generated by the trust should be reflected on the personal income tax return of the individual with the disability. Some trustees obtain a separate taxpayer identification number for special needs trusts when it is established. If the trustee does not obtain a separate taxpayer identification number for the trust, the beneficiary’s social security number is reflected as the taxpayer identification number for the trust.
How to Use IRS Form 1041
Similar to IRS Form 1040 on which individuals report their annual income to the federal government, Form 1041 U.S. Income Tax Return for Estates and Trusts is the form on which most trustees and other fiduciaries report income to the federal government. In states where trusts are also subject to a separate state income tax, there is typically a state form on which estate and trust income needs to be reported. These forms differ from state to state, so if a trustee is unsure about whether a separate state return needs to be filed, and which form is to be used, the trustee should be sure to consult with an attorney who has familiarity with trust income taxation.
When must a Form 1041 be filed?
Since special needs trusts, regardless of type, must file an income tax return with the IRS every year, Form 1041 is due at the same time personal income tax returns are due — April 15th of the year following the year for which the income is being reported. It is possible to request an extension of time to file a Form 1041, but unlike the extension granted to individuals, only 5-month extensions are granted to trusts.
How does the trustee of a special needs trust complete Form 1041?
Every year, the Internal Revenue Service updates the Form 1041 (as it does for Form 1040) and issues instructions. The instructions are very detailed and helpful in navigating the completion of the Form 1041. These forms and instructions can be found on www.irs.gov.
Should a trustee hire an attorney to assist with filing Form 1041?
Unless the trustee specializes in the income taxation of trusts, it is prudent for the trustee to consult with or hire an experienced tax and/or estates and trusts attorney. Consulting with and hiring an experienced attorney ensures that all income is reported properly and no applicable or available deductions are lost or overlooked.
For questions or concerns about tax filing requirements for special needs trusts, contact the experienced attorneys at Christopher B. Johnson today!