2023 Top 10 Tax Tips & FAQ

Tax season is upon us! Midwest Special Needs Trust (MSNT) staff are not tax professionals and cannot give tax advice. We are available for your trust sub-account questions. MSNT contracts with True Link Financial Services which facilitates trust tax preparation services with a third-party accounting firm. As a reminder, each type of trust, First Party, Third Party Irrevocable and Third Party Revocable, has its own pool for investment and management purposes. Within each pool, there are six different types of investment portfolios. Funds deposited for the Beneficiary are pooled together with similar trust and portfolio types for investment and tax optimization purposes. However, all earnings are individually accounted for. A Beneficiary’s portion of the pool is called a sub-account.

Listed below are tax tips for all trust sub-accounts administered by MSNT:

1.  Beneficiaries are responsible for filing their own personal tax returns.

2.  Personal tax preparation fees and payment of personal taxes are allowable expenses that may be submitted as a request for funds.

3.  Don’t file too soon! You will be receiving your important tax documentation in March (Grantor Letters or Schedule K-1s).

4.  Notify us of any change in address as soon as possible so the documentation we mail out gets to you as timely as possible.

5.  Sub-accounts within the First Party and Third Party Irrevocable Trust Pools are irrevocable. As of October 2020, these sub-accounts are not a separate entity for tax purposes and do not have a separate tax identification number. This reduces the tax preparation fees for each sub-account.

6.  For trust sub-accounts opened in calendar year 2023, Beneficiaries may receive tax documents from the source of funds. This should be forwarded to MSNT as soon as possible.

 

7.  The First Party Trust Pool is a Grantor Trust. The Co-Trustee, responsible party or Beneficiary will receive a Grantor Letter in March. The Grantor Letter will reflect the income and deductions for calendar year 2023. The Beneficiary will need to provide the Grantor Letter to their tax preparer to determine if there will be personal income tax consequences.

8.  The Third Party Irrevocable Trust Pool is a Non-Grantor Trust. The Co-Trustee, responsible party or Beneficiary may receive a Schedule K-1 in March. The Schedule K-1 will reflect the income and deductions for calendar year 2023. If you receive a Schedule K-1, the Beneficiary will need to provide the Schedule K-1 to their tax preparer to determine if there will be personal income tax consequences.

9.  The Third Party Revocable Pool is a Grantor Trust. The Donor will receive a Grantor Letter in March. The Grantor Letter will reflect the income and deductions for calendar year 2023. The Donor will need to provide the Grantor Letter to their tax preparer to determine if there will be personal income tax consequences.

10.  For Third Party Revocable trust sub-accounts, no 1099 will be sent. The Grantor Letter replaces the 1099.

Trust Sub-Account Tax FAQ

When will I receive my tax documents from MSNT?

Tax documents for the trust sub-account are mailed after March 15th. MSNT contracts with True Link Financial Services which facilitates trust tax preparation services with an accounting firm to accelerate the filing date for the trust income tax returns.

We realize that receiving tax documents after April 15th means that you may have to file an extension for your personal taxes. Trust tax returns cannot be filed until all 1099s are received from the investment custodian, which is not until January 31st.

Why are tax documents not mailed by January 31st of each year?

MSNT contracts with True Link Financial Services and Schwab for banking and investment services. Schwab is required to send 1099s to True Link Financial Services by January 31st. These 1099s list all of the income, gains, or losses for each trust pool.

The trust tax preparation firm must prepare a tax return for each trust pool by April 15th. However, the firm accelerates the preparation and filing for MSNT to be completed by March 15th. Because the Grantor Letters and Schedule K-1s are attachments to the trust tax returns; they are not mailed until after the filing.

The tax documents sent by MSNT are Grantor Letters and Schedule K-1s.

What is a trust versus a trust sub-account?

A Beneficiary’s portion of the pool is called a sub-account. Each type of trust, First Party, Third Party Irrevocable and Third Party Revocable, has its own pool for investment and management purposes. Within each pool, there are six different types of investment portfolios.

Funds deposited for the Beneficiary are pooled together with similar trust and portfolio types for investment and tax optimization purposes. All earnings are individually accounted for.

What are the reporting requirements for a trust?

A trust, just like an individual, is required to file an income tax return every year reporting the previous year’s income. Individual income tax returns are filed on Form 1040 while trust income tax returns are filed on Form 1041. Both income tax returns are due April 15th.

What are the reporting requirements for a trust sub-account?

Income tax forms have attachments to them that detail the activity of the past year. Both Grantor Letters and Schedule K-1s are due to the IRS on April 15th—when Form 1041 is due. 

For First Party Trust and Third Party Revocable trust sub-accounts, Grantor Letters are attached to the Form 1041. These letters detail the activity within the trust that may be taxable to the Beneficiary (Donor). 

For Third Party Irrevocable trust sub-accounts, Schedule K-1s are attached to the form 1041. These schedules detail the activity within the trust that may be taxable to the Beneficiary. 

Both Grantor Letters and Schedule K-1s are due to the IRS on April 15th—when Form 1041 is due.

What is a Grantor Letter?

The Grantor Letter will reflect the income and deductions for calendar year 2023. The Beneficiary will need to provide the Grantor Letter to their tax preparer to determine if there will be personal income tax consequences.

What is a Schedule K-1?

The Schedule K-1 will reflect the income and deductions for calendar year 2023. If you receive a Schedule K-1, the Beneficiary will need to provide the Schedule K-1 to their tax preparer to determine if there will be personal income tax consequences.

What is the cost of the tax preparation for my trust sub-account?

There is a $40 tax preparation fee charged to the trust sub-account. This fee will be reflected on the quarterly trust sub-account statement.

What do I do with my tax document?

The Grantor Letter will reflect the income and deductions for calendar year 2023. The Beneficiary will need to provide the Grantor Letter to their tax preparer to determine if there will be personal income tax consequences.

The Schedule K-1 will reflect the income and deductions for calendar year 2023. If you receive a Schedule K-1, the Beneficiary will need to provide the Schedule K-1 to their tax preparer to determine if there will be personal income tax consequences.

I used to get a 1099, why didn’t I get one this year?

For Third Party Revocable trust sub-accounts, no 1099 will be sent. The Grantor Letter replaces the 1099. 

The Third Party Revocable Pool is a Grantor Trust. The Donor will receive a Grantor Letter in March. The Grantor Letter will reflect the income and deductions for calendar year 2023. The Donor will need to provide the Grantor Letter to their tax preparer to determine if there will be personal income tax consequences.

Can MSNT staff advise on my taxes?

MSNT staff are not tax professionals and cannot give tax advice. We are available for your trust sub-account questions.

Do I have to file personal taxes?

Based on individual circumstances, some Beneficiaries may not be required to file a personal tax return. Please consult with your tax preparer to understand how the trust sub-account tax documents may affect your requirement to file a personal tax return.

Can my trust sub-account pay my personal taxes or my tax preparation fee?

Personal tax preparation fees and payment of personal taxes are allowable expenses that may be submitted as a request for funds.

How come I received a corrected tax document after MSNT already mailed one?

Various deadlines can cause ripple effects. If the investment custodian discovers additional information, the investment custodian sends an amended or corrected Form 1099. When the trust tax preparer receives an amended or corrected Form 1099, the trust tax filing process must begin again with an amended or corrected filing. 

That means that amended Grantor Letters or Schedule K-1s are then sent out to the Co-Trustee, responsible party, or Beneficiary, who will in turn, have to file an amended personal tax return. While all of this is unfortunate, it does happen routinely and should be expected from time to time.

I’m trying to file my 1040 with TurboTax, how do I input the information from my trust sub-account tax documents?

It has been suggested by a CPA to use an input for a brokerage statement. Often, this is called a Consolidated 1099 input because it combines a 1099-INT, 1099-DIV and Capital Gains details. 

The Beneficiary would enter interest to one form as if it came from a 1099-INT. Dividends to the next as if it came from a 1099-DIV along with REIT Dividends and foreign tax credit details related to the Dividends. 

Capital Gains go to the third form based on the Term/Covered or noncovered, and the proceeds and basis should equal the amounts on page 1. 

State Muni Interest should be multiplied by the % for the resident state, the amount that is not sourced from the resident state (Total Muni – Resident State Muni) is often added back to the state income. States tax other state’s Muni Interest. 

This may be able to be entered on the same brokerage inputs with the total and resident state % and flow to the state form. 

The Schedule A deductions would be a different series of inputs for deductions to determine if the person itemizes or takes the standard deduction.

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