At BLISS 1041, we believe in the power of clear communication and shared understanding. We know that the world of Special Needs Trusts (SNTs) comes with its own unique language, and we’re here to help you navigate it. As part of our ongoing commitment to serving the special needs community, we’ve put together this comprehensive glossary of key terms used in the Pooled Special Needs Trust industry. Our goal is to help you unravel the complexities of trust management language, making it easier for you to focus on what truly matters – supporting your beneficiaries.
Trust Types and Related Terms
Trust: A legal arrangement where a third party, known as a “trustee,” holds and manages assets in a trust fund on behalf of a “beneficiary.” The trust document outlines the trustee’s authority, how the trust should benefit the beneficiary, its usage, and other essential information.
Special Needs Trust (SNT): A type of trust designed to enable a person with a disability (referred to as the “beneficiary”) to receive payouts from a trust while preserving access to public benefits such as Supplemental Security Income (SSI), Social Security Disability Insurance (SSDI), HUD/Section 8 subsidies, Medicare, and/or Medicaid. The funds in these trusts are used to supplement, not replace, the benefits the individual receives from government programs like Medicaid and Supplemental Security Income (SSI).
Pooled Special Needs Trust (PSNT): A PSNT is a specific type of SNT. The trust must be managed by a nonprofit organization. In a PSNT arrangement, each beneficiary has a distinct account, similar to an SNT. However, for investment and management purposes, these accounts are collectively “pooled.” A PSNT can accommodate first-party or third-party beneficiary accounts or can be structured to accommodate both types.
First-Party Special Needs Trusts / Grantor Trusts: (Also known as “self-settled,” “self-funded,” or “d4C trusts” trusts.) These are SNTs trusts funded with the assets of the individual with a disability (the “beneficiary”). The grantor (the individual establishing the trust) is considered the owner of the trust assets for tax purposes. Beneficiaries/Grantors receive a “Grantor Letter” that outlines their portion of income, deductions, and credits associated with the trust, which they use for their personal tax filing. Some of the requirements for First-Party SNTs include the following: the beneficiary must be under the age of 65 when the trust is created and funded; the trust must be irrevocable and provide that Medicaid will be reimbursed upon the beneficiary’s death (or upon termination of the trust), and the trust must be administered for the sole benefit of the beneficiary.
Third-Party Special Needs Trusts: These are SNTs funded with assets that do not belong to the beneficiary with a disability. The assets could be from parents, relatives, or friends of the beneficiary or from other sources like a legal settlement paid to another individual on behalf of the beneficiary. Unlike first-party SNTs, there are no age restrictions or Medicaid payback requirements for third-party SNTs. However, the beneficiary must not have the power to revoke, terminate, or sell the trust for their own benefit, as this would make the trust a countable resource for Medicaid purposes. If structured properly, a third-party SNT can provide additional resources for the beneficiary without affecting their eligibility for government benefits. Beneficiaries of a Third-Party trust receive a Schedule K-1, a tax document that reports the beneficiary’s share of income, deductions, and credits from the trust, which they use for their personal tax filing.
Revocable Trust: Revocable trusts let the living grantor change instructions, remove assets, or terminate the trust.
Irrevocable Trust: Irrevocable trusts are trusts where the grantor cannot change or end the trust after its creation.
Testamentary Trust: A trust created under a last will and testament and is not funded until the death of the person who created the will.
Inter vivos Trust: A trust established during the lifetime of the grantor.
Resident Trust: The term “resident trust” is defined differently by each state, often based on a combination of factors such as the location of trust creation, the place of trust administration, the residence of the trustee, and the residence of the beneficiaries. These factors can significantly impact state tax obligations. While many states may levy income tax on trusts based on the location of administration, the criteria determining a resident trust can differ considerably from one state to another. Because of this, a trust can be considered a resident of multiple states and require filing in each such state.
Key Roles in Trust Management
Grantor/Settlor/Trustor: The person who creates and funds the trust. Depending on the type of trust, the grantor could be a third party, like a parent or other family member, or the grantor may be the beneficiary in the case of a first-party trust.
Trustee: The person or entity who manages the trust assets and administers them according to the trust document. This could be a family member, friend, attorney, financial institution, a nonprofit organization administering a Pooled Special Needs Trust, or another fiduciary.
Successor Trustee: The person or entity nominated to take over if the initial trustee is no longer able or willing to serve. This successor trustee must satisfy specific requirements before assuming the trustee role.
Beneficiary: The person for whose benefit the trust is established. In the case of SNTs, a person with a disability would be designated as the beneficiary of the trust.
Remainder Beneficiary: The individuals who will receive any remaining trust assets when a trust ends, usually upon the beneficiary’s death. For first-party SNTs, the state’s Medicaid division must often be the first remainder beneficiary.
Financial Terms Related to Trusts
Pooled Trust Income Allocation: If the trust is part of a pooled trust, this refers to how the trust’s income is allocated among the beneficiaries.
Distributable Net Income (DNI): DNI is a tax term and refers to the income that is distributed or could be distributed to the beneficiaries of the trust for tax purposes. PSNTs have unique rules involving the calculation of DNI. While filing a single tax return, IRS Code § 1.663(c)-1 requires PSNTs to calculate DNI on a per-beneficiary basis. This allows each account to be fairly taxed.
Distributions: These are the amounts paid out for the benefit of the beneficiaries of the trust. Some distributions may be deductible to the trust, while others may reduce the beneficiaries’ taxable income.
Deductible Distributions: Some distributions are deductible to the trust, while others can be used to reduce the beneficiaries’ taxable income. Trust deductions will be recorded on the trust’s tax return while those that may benefit the beneficiary are often included in the Grantor Letter or in the footnotes of the K-1. Learn more about disbursements
Name Control: A four-character control name the IRS assigned to your trust when the trust applied for its EIN. It is a necessary component of the electronic filing tax process. It is provided initially to the trustee in the same correspondence as a requested Employer Identification Number (EIN). Learn More about the IRS Name Control
Electronic Return Originator (ERO): An ERO is an authorized e-file provider who has been approved by the IRS to assist taxpayers in preparing and electronically filing tax returns. EROs play a crucial role in the electronic filing process, as they are responsible for submitting completed tax returns to the IRS on behalf of taxpayers or fiduciaries. They ensure the accuracy of the data, obtain the necessary signatures, and provide the taxpayer with a copy of the return.
IRS Form 1041: Also known as U.S. Income Tax Return for Estates and Trusts, this is the tax form that a trust must file annually with the Internal Revenue Service (IRS).
Form 8879-F: This is an IRS form used by a fiduciary and an Electronic Return Originator (ERO) when the fiduciary wishes to sign an estate’s or trust’s electronic income tax return. Essentially, it serves as an authorization form for e-filing and, if relevant, electronic payment of a trust’s or estate’s income tax return.
Grantor Tax Letter: A Grantor Tax Letter is a tax document from a Grantor Trust that reports the beneficiary’s share of income, deductions, and credits from the trust. It is part of the trust’s tax return and is also provided to each beneficiary for their individual tax filing.
Schedule K-1: Schedule K-1 is a tax document from a Non-Grantor trust that reports the beneficiary’s share of income, deductions, and credits from the trust. It is part of the trust’s tax return and is also provided to each beneficiary for their individual tax filing.
Form SS-4: The IRS form used by a new trust to apply for an Employer Identification Number (EIN).
CP 575.B: This is the name of the IRS notice issued when an Employer Identification Number (EIN) is obtained. The name control can be found on the second page of this letter.
We hope this glossary proves to be a handy tool for you, helping to clarify some of the key terms involved in managing a special needs trust and preparing taxes. Remember, terminology can vary based on the state, the type of trust, and the specific trust agreement. At BLISS 1041, we’re here to provide you with the resources and expertise you need to make a positive impact in the lives of your beneficiaries. We’re with you every step of the way.
Disclaimer: The information provided in this blog post is for educational purposes only and is not intended to be construed as legal or tax advice. While we strive to provide accurate and up-to-date information, laws and regulations often change, and the application of them can vary widely based on the specific facts and circumstances involved. Therefore, you should always consult with a qualified tax advisor or legal professional before making any decisions or taking any actions based on the information provided in this blog post.