Bay Area Estate And Tax Planning Law Firm

Spotlighting tax duties re a special needs trust

On Behalf of | Jun 2, 2020 | Uncategorized |

Trusts are impressively flexible and creative estate planning instruments that provide varied benefits – including significant tax advantages – for their creators and beneficiaries.

Many trusts readily illustrate that utility, including a special needs trust. That trust vehicle enables a beneficiary to receive benefits under select government programs (for example, Medicaid and Supplemental Security Income) while protecting personal assets held in trust. Funds from a trust can be used for a beneficiary’s benefit without compromising needs-based eligibility.

How are trust proceeds taxed when a beneficiary dies?

Funds in a special needs trust are often earmarked for alternative parties when a beneficiary dies. How are they taxed?

An article focused on that question properly notes that the answer “depends on how the special needs trust was established and funded.”

If funds belong to the beneficiary as the result of, say, a personal injury settlement, monies sought to be passed along to remainder beneficiaries may be subject to an inheritance tax. Relevant assets will be afforded a so-called “step up basis” to reduce the brunt of any capital gains.

Conversely, funds held in a trust created by a third party for the benefit of a special needs beneficiary are not deemed to have been owned by the latter. The above article stresses that remainder beneficiaries receiving them “will have to pay [full] capital gains on appreciated property when they sell it.”

Securing guidance on tax treatment re a special needs trust

The information conveyed in today’s blog post might reasonably invite various questions concerning the establishment of a special needs trust and an understanding of tax consequences at a future date. An experienced estate planning attorney can provide guidance on those and related matters.