Form 1041 Special Needs Trust - Expenses paid for SN beneficiary's daily expenses - Where to report?
Hi.
Have a new client, who has special needs.
A SN (Special Needs) trust was set up for her, funded by her recently deceased father.
Said father has a Rev turned Irrev. Trust which holds a house and land. Once both are sold, the father's trust pays the taxes, transfers the remaining funds to Her SN trust, to fund it, then is shut down.
Funding will come from father's trust and from two other sources:
1. Inherited IRA ... new 2018/2019 rules allows her to retain the distribution of funds over her remaining lifetime for those with special needs.
2. Investment Fund
(Still getting information on who the beneficiary is of the fund since it was the father but don't Yet if it went to His trust or Her trust. It'll most likely end up in hers as an inherited investment fund).
3. Govt funding.. Medicaid (and other funds)?
Will have to talk to the Trustee further who needs to approve for All the expense payments directly.
He mentioned there was a debit card which the beneficiary can use so that's flag right there.
The issue:
I've read in many places and spoke with other tax preparers, CPAs/EAs, who do things 'differently'.
The SN trust pays for the daily living expenses for the SN beneficiary.
Are those expenses deductible on the trust? Or treated as a distribution on Sch B, Distributions and Not a deduction?
There's really No 'proper' guidance on what to do with the funds paid for daily expenses, which are allowed such as utility bills, auto expenses, possibly medical expenses, property taxes for house (no mortgage as it's all paid off).
Nothing on the IRS's website about Special Needs Trust or any accounting/tax literature found, Yet.
Read that food was not allowed?
The expenses can Not be double dipped, in that any funds received by Medicaid, etc... should pay for daily living expenses First like groceries, etc...
How are those expenses reported, if anywhere?
The beneficiary shouldn't get a K-1 as the money used as paid directly for expenses and NOT paid directly to her as cash.
Would it be considered something like 'daily living expenses' under "Deductions" on Form 1041 on the front?
Form 1041 with 'Qualified disability trust' will be checked.
Thank you in advance for your time and advice.
