2017 National Conference on Special Needs Planning and Special Needs Trusts What Beneficiaries Need to Know

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2017 National Conference on Special Needs Planning and Special Needs Trusts What Beneficiaries Need to Know about SNT Income and Taxation? Vincent J. Russo J.D., LL.M.

He has championed the rights of seniors and people with special needs since 1985.

1 2017 National Conference on Special Needs Planning and Special Needs Trusts What Beneficiaries Need to Know about SNT Income and Taxation? Vincent J. Russo J.D., LL.M. in Tax, CELA, CAP October 18, 2017 VINCENT J. RUSSO, J.D., LL.M., CELA, CAP, is the Managing Shareholder of Russo Law Group, P.C., Long Island s Signature Elder Law, Special Needs and Estate Planning Law Firm with offices on Long Island and New York City. He has championed the rights of seniors and people with special needs since Vincent is a Founding Member, Fellow and Fifth President of the National Academy of Elder Law Attorneys (NAELA) and is a Founding Member and First President of the New York Chapter of NAELA. Additionally, he is the only NAELA member to receive the prestigious President s Award twice and is also a member of the invitation only, NAELA Council of Advanced Practitioners (CAP). He is a Trustee and was the Founding Chair of the NAELA Foundation. Vincent is a certified elder law attorney by the National Elder Law Foundation. He is a Founding Member and Past Chair of the Elder Law Section and Co Chair of the Special Needs Section of the New York State Bar Association (NYSBA). Vincent is a Co Founder of the Academy of Special Needs Planners and Past Board Member and President of the Guardianship Corporation of Cerebral Palsy of Nassau County. He is also Co Founder and Chairman of the Board of ElderCounsel, LLC. Vincent is a Co Founder of the Theresa Alessandra Russo Foundation and the Theresa Academy of Performing Arts for Children with Special Needs, which were established in memory of his daughter, Theresa. He also created and co hosts Family Comes First, a television on cable TV, which has won Three Telly Awards. He is admitted to the New York, Massachusetts and Florida State bars and is the co author of New York Elder Law and Special Needs Practice (Thomson Reuters). Mr. Russo is a nationally recognized speaker and noted authority on Elder Law, Special Needs and Estate Planning. His distinction in Elder Law, Special Needs and Estate Planning has made him one of the most prominent attorneys in his field.

2 Today s Special Needs Tax Workshop Federal Income Tax Overview Reporting Income and Expenses Taxation of Special Needs Trusts Tax Interplay of Trust and Beneficiary Reporting of Trust Income and Expenses Traps and Tips Russo Law Group, 2

3 Federal Income Taxation Who has to file? Income over $10,350 (2016) Individual Tax Rates Russo Law Group, 3

4 1041 Federal Income Tax Return Filing of the Federal Tax Return Options as to the Form Filed Due Date of the Return Who can sign the Return Russo Law Group, 4

5 Reporting of Income and Expenses Sources of Income Income Earned by the Beneficiary Passive Income Received by the Beneficiary Trust payments to or for the benefit of the Beneficiary May be subject to reporting as Income Types of Expenses Itemize versus Standard Deduction Medical Expense Deduction Russo Law Group, 5

6 Income: Early Withdrawal of IRAs General Rule: 10% Penalty Exception to the General Rule Annuity 72t payments Excess Medical Expense Health Insurance Permanent Disability No gainful employment Physician determination Russo Law Group, 6

7 Income: Qualified Retirement Funds Beneficiary of a Stretch IRA Reporting of the Income Amount and Timing Russo Law Group, 7

8 Medical Expense Deduction Special Education and Training Treas. Reg (e)(1)(v) Special School Primary Purpose Alleviating the Handicap Russo Law Group, 8

9 Medical Expense Deduction Qualifying Capital Expenditures Treas. Reg (e)(1)(iii) Permanently Improve Residence / Medical Care Remove Structural Barriers Russo Law Group, 9

10 Medical Expense Deduction Expansion of Medical Expense Deduction Special Food Individualized tutoring Play Related Therapies Medical Conferences Russo Law Group, 10

11 Taxation of Special Needs Trusts: Overview Type of Special Needs Trust Federal Tax Return Form 1041 Trust Tax Rates Taxpayer Identification Number Schedule K 1 issued to the Beneficiary Informational Statement of Income and Expenses Russo Law Group, 11

12 Types of Special Needs Trusts First Party versus Third Party Special Needs Trusts Income Tax Status of the SNT Grantor Trust Non Grantor Trust (Complex Trust) Taxable Income and Tax Rates Taxpayer Identification Number Russo Law Group, 12

13 Income Taxes: Trust Income Must be Reported on the Trust Income Tax Return (unless an exception is met) If Exception is met, All income may be reported on the grantor s personal income tax return All or part of the income may be reported on the beneficiary s personal income tax return All or part of the income may be reported on the trust income tax return Russo Law Group, 13

14 Income Taxes: Examples of Grantor Trusts All First Party Special Needs Trust Revocable Third Party Special Needs Trusts Optional Third Party Irrevocable Special Needs Trust Russo Law Group, 14

15 Taxation of Special Needs Trusts Federal Tax Return Form 1041 Selection of the Type of Trust Distributable Net Income (DNI) Russo Law Group, 15

16 Taxation of Special Needs Trusts Trust Tax Rates Trust Tax Rates versus Individual Tax Rates Minimizing Income Taxation Russo Law Group, 16

17 2017 Federal Tax Bracket Tax Rate Single Married Joint Estate or Trust 10% $0 9,325 $0 18,650 N/A 15% $9,326 37,950 $ 18,651 75,900 $0 $2,550 25% $37,951 91,900 $75, ,100 $2,551 6,000 28% $91, ,650 $153, ,350 $6,001 9,150 33% $191, ,700 $233, ,700 $9,151 12,500 35% $416, ,400 $416, ,700 N/A 39.6% $418,401 + over $470,701 + over over $12,500 Russo Law Group, 17

18 2017 Income Tax Traps Taxable Income Single Married Joint Estate or Trust $10,000 $10,33.75 $1,000 $2, $20,000 $2, $2, $6, $50,000 $8, $6, $18, $100,000 $20, $16, $37, $200,000 $49, $42, $77, Russo Law Group, 18

19 Complex Trust 65 day Rule Minimizing Income Taxes Distributable Net Income Ability to fix DNI after the end of the Tax Year Trap: Beneficiary may have to report income as received in the prior year Russo Law Group, 19

20 Special Needs Trusts: TIN Taxpayer Identification Number (TIN) Trust TIN Grantor Trust or Non Grantor Trust Social Security Number of the Beneficiary Grantor Trust Russo Law Group, 20

21 SNT First Party: Grantor or Non Grantor Trust All (Maybe All) Grantor Trusts? Beneficiary reporting of Income Passive Income Estimated Tax Payments Russo Law Group, 21

22 Income Taxes: Grantor Trust (Taints) Reversionary Interest in the Trust (IRC 673) Grantor may Exchange Property of Equivalent Value in Non Fiduciary Capacity (IRC 675) Use Trust Income to Pay Premiums of Insurance on Life of Grantor or Grantor s Spouse (IRC 677) Russo Law Group, 22

23 Income Taxes: Grantor Trust (Taints) Power to Revoke (IRC 676) Do not use the Power to Revoke if a First Party Special Needs Trust (where the beneficiary is accessing or seeking to qualify for Supplemental Security Income and/or Medicaid) Income Payable by Grantor or Non Adverse Party (trustee) to the grantor (IRC 677) Without the consent of an Adverse Party (Trustee) any person who has a substantial beneficial interest in the trust which would be adversely affected (IRC 672) Russo Law Group, 23

24 Obtaining Grantor Trust Status Over Principal Important when Dealing with Appreciated Assets Will allow the Grantor to Maintain IRC 121 exemption on sale of primary residence Ensures that individual capital gains tax rates apply when trust assets are sold For example, Sale of Stock and Bonds Russo Law Group, 24

25 Obtaining Grantor Trust Status Over Principal Grantor Trust Powers that give Grantor Trust Status with Respect to Principal Power to substitute assets of equivalent value or power to add charitable beneficiaries Powers within the Internal Revenue Code which cause Estate Tax Inclusion 2036(a)(2) testamentary power of appointment to change beneficiaries Russo Law Group, 25

26 Income Taxes: Non Grantor Trusts All Testamentary Trusts Qualified Disability Trust Optional Third Party Irrevocable Special Needs Trusts Russo Law Group, 26

27 Income Taxes: Advantages of a Grantor Trust Income Tax Consequences stay with the Grantor Consider the Tax Bracket of the Grantor Single Individual reaches 39.6% at $418,401 for 2017 Trust reaches 39.6% bracket at $12,501 for 2017 Simpler Tax Filings Easier to Explain to the Client Russo Law Group, 27

28 Income Taxes: Advantages of a Non Grantor Trust Grantor does not have to come up with funds to pay tax on phantom income Spread out the income tax consequences Beneficiary who receives the income pays the income tax in beneficiary s tax bracket Higher exemption amount as a Qualified Disability Trust Russo Law Group, 28

29 Income Taxes: Disadvantages of a Non Grantor Trust If not Careful, Higher Overall Taxes Beneficiary does not Understand that they need to come up with Income Tax Payments More Complicated Trustee needs to pay attention to calendar year end distributions Russo Law Group, 29

30 Reporting of Trust Income and Expenses Understanding the Schedule K 1 How to report the line items of the Schedule K 1 Russo Law Group, 30

31 Reporting of Trust Income and Expenses Reporting of the Income Reporting of the Expenses Russo Law Group, 31

32 Reporting from SNT Informational Statement Grantor Trust Reporting of the Income and Expenses Russo Law Group, 32

33 Traps and Tips: Overview Impact of Reporting Income Failure to File Penalty Failure to Pay Penalty and Interest Liability for Payment of the Tax Estimated Tax Payments The Kiddie Tax Russo Law Group, 33

34 Reporting of Income and Social Security Benefits Supplemental Security Income Maybe Impact Actual Receipt or In Kind Income and Support Social Security Disability Benefits No Impact Russo Law Group, 34

35 Reporting of Income and Medicaid Benefits Medicaid Benefits No Impact Russo Law Group, 35

36 Reporting of Income and ACA Reporting of Trust Income will impact cost of health insurance under ACA Russo Law Group, 36

37 Reporting of Income and HUD Housing Trust Income may impact the benefits available under the HUD Housing Program Russo Law Group, 37

38 Traps and Tips: Failure to File Penalty Trap: Penalty Tip: File for an Extension to File Tip: Request to Waive the Penalty Russo Law Group, 38

39 Traps and Tips: Failure to Pay Traps: Failure to Pay Penalty Interest on Late Payment No Extension available Tips Pay the tax as soon as possible after the due date Designating Payment of Tax Only when seeking a waiver of Penalty and Interest Request to waive the Interest Charge Russo Law Group, 39

40 Traps and Tips: Failure to Pay Tip: Taxpayer Advocate Tip: Hardship Waivers Tip: Amnesty Programs State Russo Law Group, 40

41 Traps and Tips: Liability for the Tax Liability for Payment of the Tax Beneficiary Trustee of the Special Needs Trust? Legal Guardian of the Beneficiary? Russo Law Group, 41

42 Traps and Tips: Estimated Tax Payments Who must pay estimated tax payments? When are they due? What is the Penalty for not paying Estimated Tax Payments What are the Exceptions to the Penalty Rule Russo Law Group, 42

43 Traps and Tips: Kiddie Tax Third Party SNT of Parent for a Minor Child Russo Law Group, 43

44 Traps and Tips: State Income Tax Filing of State Income Tax Return Reporting of Income and Expenses Estimated Tax Payments Russo Law Group, 44

45 Russo Law Group, 45

46 Circular 230 Pursuant to the rules of professional conduct set forth in Circular 230, as promulgated by the United States Department of the Treasury, nothing contained in this communication was intended or written to be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer for such purpose. No one, without our express prior written permission, may use or refer to any tax advice in this communication in promoting, marketing, or recommending a partnership or other entity, investment plan or arrangement to any other party. For discussion purposes only. This work is intended to provide general information about the tax and other laws applicable to retirement benefits. The author, his firm or anyone forwarding or reproducing this work shall have neither liability nor responsibility to any person or entity with respect to any loss or damage caused, or alleged to be caused, directly or indirectly by the information contained in this work. This work does not represent tax, accounting, or legal advice. The individual taxpayer is advised to and should rely on their own advisors. Russo Law Group, 46

47 2017 National Conference on Special Needs Planning and Special Needs Trusts What Beneficiaries Need to Know about SNT Income and Taxation? Vincent J. Russo J.D., LL.M. in Tax, CELA, CAP October 18, 2017

~~~~~ How to Make a Trust a Special Needs Trust

12 th Annual Changes and Trends Affecting Special Needs Trusts University of Texas School of Law February 4, 2016 Austin, Texas ~~~~~ How to Make a Trust a Special Needs Trust Written and Presented By:,