HOW IS A SPECIAL NEEDS TRUST TAXED?

Trust tax rates are usually much higher than individual tax rates.  This is because the top federal income tax rate for trusts is 37% on income at just over $15,000.  An individual does not hit the 37% tax rate until earning are over $626,350. Individual tax rates do not hit 12% until the individual’s income is $11,926.  As a general rule, the beneficiary of a Special Needs Trust is disabled and pays a rate that may not exceed 10%.  Depending on how the trust is worded and administered, the income earned by the trust could be taxed to the grantor (the person establishing the trust and funding it), the beneficiary (the person benefiting from the trust), or the trust itself.  The trick is to determine who is in the lowest tax bracket and attempt to design the trust so that the income is taxed to that person.