I'm afraid tax issues are definitely not my forte, and I would actually suggest that you consult with a CPA, not an attorney on this. You never know, you might get lucky an find an attorney here who is comfortable providing some guidance, but that's just not the end of things we deal with. Out of personal curiosity, I did an Internet search an came up with the article in the following link, which comes from a group that might be generally helpful:
Obviously, I don't know anything about them or the accuracy of what theyre saying (and I really only skimmed the information), but it might give you a place to start. Rather like the law itself, though, tax regulations change constantly, though, so you might keep in mnd that what you find may not be current (again, I'd advise going with a CPA, who would keep up with that). Good luck.
In a typical special needs trust in this situation, if the trust generates $100 or more in gross income (interest, dividends, and capital gains), you must file a Form 1041 as trustee, which is generally due on April 15 (or later if a weekend or holiday) of the next year unless you file for a five-month extension. If the taxable income is over this threshold, then I recommend obtaining the services of a CPA who has experience in preparing fiduciary income tax returns (i.e., not just 1040s). Depending on the nature of the assets and how good your records are, it may not be very expensive, and you can charge the tax preparation fees to the trust. That said, in my experience (as a CPA and an attorney), the Form 1041 is NOT a very intuitive return and there is no user-friendly software to prepare it.
I should also mention the way fiduciary income taxation works. If you make no distributions to or for the beneficiary during the calendar year, the trust pays the income tax. But to the extent you made distributions to the beneficiary, the beneficiary will recognize the net taxable income of the trust. Thus, the trust's Form 1041 may be needed to prepare the beneficiary's Form 1040.
If the gross income of the trust exceeds the $100 threshold and you need help finding a professional to prepare the return for the trust, send me an email and I can help you.
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You need to be filing a fiduciary income tax return a Form 1041 for the federal and if TX has one you must file there too. (However, if TX does not have an income tax then one may not be required.) Anyway, the trust reports its income and expenses on the return. If it pays out income to the beneficiary that amount is deducted. Once the distributable net income or DNI is distributed to the beneficiary it reduces the taxable income of the trust. The trust pays income on its net income and has compressed tax brackets. The beneficiaries receive a K-1 from the trust and report the income reflected thereon.
Hope this helps.
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