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Read moreIs a First-Party Special Needs Trust Taxed as Grantor Trust?
- September 23rd, 2024
Q
Can a first-party special needs trust (funded through a settlement on personal injury) be taxed as a grantor trust if grantors are parents? If treated as a grantor trust, will income taxed to the disabled party jeopardize public benefits?
A
Yes, it should be treated as a grantor trust since even though the parents are the “grantors” on the trust document, the trust is funded with the child’s money, so they are the grantor for tax purposes. This will not affect the child’s eligibility for public benefits because the definition of “income” for tax purposes is different from its definition for public benefits eligibility determinations. For the latter, only income that is actually distributed to the beneficiary counts.
Harry S. Margolis practices elder law, estate, and special needs planning in Boston and Wellesley, Massachusetts. He is the founder of ElderLawAnswers.com and answers consumer questions about estate planning issues here and at AskHarry.info.