Your Trustee Toolkit: Trust Taxation Basics and Finding the Right CPA
This article is a part of True Link’s SNT Expert Series. We have interviewed leaders knowledgeable in disability planning, Elder Law, and trust administration and will be sharing their expertise with you in a series of videos and posts. Note: the opinions and views expressed in these videos do not necessarily reflect those of True Link Financial or True Link Financial Advisors. This article is not intended to provide investment, legal, tax, accounting or medical advice. Before making decisions involving investing, legal, tax, accounting or medical concerns, you should consult appropriate professionals regarding your speciﬁc situation.
As a trustee, making the right decisions about tax planning and compliance is crucial to ensuring your loved one’s financial wellbeing. That’s why many family members turn to a tax professional to provide guidance on what’s best for their particular situation. In this post, we share trust taxation basics that can help you know what to look for when hiring a Certified Public Accountant (CPA) or tax professional.
1. Trusts are their own tax-paying entity
At the most basic level, the CPA you’re working with should have experience in trust accounting and taxation. Peter J Wall, the Director of Fiduciary Services reminds us that “when you create a trust vehicle, it becomes its own tax paying entity.” Taxes need to be paid when the trust earns income or realizes capital gains – this could be when assets within a trust earn interest, stock holdings pay dividends, or investments are sold for a return.
2. First-Party trusts and Third-Party trusts have different taxation schemes.
How a trust is established and from whom funding comes from impacts how the income is taxed – particularly whether it’s a third-party or first-party trust. So you “need to have not only a CPA who understands the difference between those, but also a financial planner or investment manager, sometimes one who chooses to work in conjunction with a tax professional, that can appropriately structure the investments within the trust so that they are not taxed at a higher trust tax rate,” Wall shares.
3. How money is used matters
When it comes to Supplemental or Special Needs Trusts (SNTs), how trust funds are used can also impact tax consequences. For example, as Elder Law Attorney Laurence Eric Davidow explains, “[If] the income comes out of that trust every year and is used for your child [with disabilities] – not necessarily just given to the child, but actually used for the child's benefit –then the trust gets a deduction, and the taxes are paid by your child with disabilities at a much lower [income tax] level.”
According to Davidow, you want to find a CPA who understands the nuances and rules surrounding SNTs, “a lot of people out there would like to help you, but not everybody has the expertise.” He suggests asking tax professionals to share how many SNTs they’ve worked on and get referrals to clients navigating similar situations. And if you’re struggling with where to start, ask your network for recommendations – if you’re working with an Elder Law attorney or special needs planner, they likely know accountants who specialize in SNTs.
Want to watch these videos on Vimeo? Here are the links to the guest expert videos related to this topic:
Choosing your Tax and Investment professionals for an SNT – Peter J Wall, Director of Fiduciary Services at True Link Financial Advisors
Tax Considerations for Special Needs Trusts – Laurence Eric Davidow, Elder Law Attorney and Managing Partner at Davidow, Davidow, Siegel & Stern
Finding a CPA and other Trust Professionals – Laurence Eric Davidow, Elder Law Attorney and Managing Partner at Davidow, Davidow, Siegel & Stern