Trusts and Taxes: Federal and MA and AR state

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Trusts and Taxes: Federal and MA and AR state

Post by terran » Tue Sep 04, 2018 10:45 am

It looks like I'll be taking over as Trustee for a Special Needs Trust of which my sister is the beneficiary.

The trust was set up as an irrevocable trust by my Grandmother, a Massachusetts resident, while still alive but she is now deceased. My Sister, also a Massachusetts resident, has been disabled since childhood and collects SSI. She is the only current beneficiary. I am an Arkansas resident and will be the only trustee. I am also a secondary beneficiary if my sister dies. There are no other beneficiaries, but if both my sister and I die then my mother, a Massachusetts resident, will receive a full distribution of the trust assets.

I don't know if this is relevant to taxation, but the trust document states:
The Grantor intends, by execution of this Agreement, to create a Massachusetts Trust, to be construed in every respect in accordance with the laws thereof.
To date the trust has had no income (non interest bearing bank account only), so the current trustee has never filed taxes for the trust. I will certainly be investing some of the trust's assets, so I expect to need to file taxes in the future.

My Questions:

1. My understanding is that if a trust has only disabled beneficiaries it can be considered a qualified disability trust and gets a federal exemption equal to the personal exemption (or something like it now that the personal exemption is going away). Am I correct in thinking that this is true even though I am a contingent beneficiary if my sister dies since she is the only beneficiary currently eligible to receive trust distributions and she is disabled?

2. My understanding is that in Massachusetts the taxability of trust income is based on the residency of all trustee's. Does this mean that even though the trust was established by a MA resident, and the only current beneficiary is a MA resident that the trust won't owe MA tax on retained income because I, as the only trustee, am not a MA resident? Or does the language about the trust being a MA trust or something else negate this?

3. I've emailed with someone in the income tax department in Arkansas and they say trust taxation is based on where a trust is established, so a trust established in MA would not be taxable in AR. This seems counter to what I'm reading for MA and some other states, so can anyone confirm that this is true for AR? And if MA does actually base taxation on trustee residency and AR bases it on where the trust was established, does this mean that the trust won't be subject to state income tax?

4. I understand that if the trust distributes income that I'll need to file a K-1 and this income will be taxable to the beneficiary not the trust. Does any distribution necessarily come first from income, or is it possible to retain income in the trust while making distributions from principle?

5. Assuming I have to file a federal k-1, does this mean I'll have to file something similar in MA even if the trust itself isn't subject to MA taxation?

6. Does anyone have any general or specific advice on finding a professional to help with this? I'm thinking these are more questions for an accountant? Or should I be talking to a lawyer? Does anyone have any specific recommendations for a professional in either MA or AR that I might consider talking to (feel free to PM me if you don't want to post on the open forum)?


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