Special Needs Trust, Trustee Fees where to record on Beneficiary's 1040

[Jesse57]

Client is a young child with a Special Needs Trust.  Unearned income exceeds limit so he files a separate return.  Trustee Fees are significant, > $22,000.  I know we can't deduct the Investment Advisor fees, but where would the Trustee Fees be recorded?  (Schedule A: Miscellaneous expenses?)

[sjrcpa]

Presumably paid by the Trust. Deducted on the Trust's 1041.

[Jesse57]

Thanks for taking the time to reply.  This Trust is a Simple Grantor Trust in which the Grantor self-funded the Trust and is also the Beneficiary.  All items of income and expense flow through to the Beneficary's 1040.  He receives a combined 1099 like we would from our broker.  I am fairly certain the Trustee fee goes on Schedule A in the Miscellaneous Deductions not subject to the 2% Floor, Would just feel better if a peer would confirm.  I like your comment, "The more I know the more I don't know" 🙂

[BobKamman]

I think it would go on the 1041 as a miscellaneous deduction not subject to the 2% floor, but you have to wait until next year if you want to claim it on Schedule A (and probably not then, either, because corporations have special needs too). 

I haven't seen any special needs trusts that are not irrevocable, but I suppose it can happen.  

[sjrcpa]

Not deductible on a 1040.

[Jesse57]

This SNT is a Grantor Trust, confirmed by two separate Trustees, the income is reported on a composite 1099 then I have all the payments from the Trust to consider, some of which are deductible on the Grantor's 1040 and some not.  Thanks for your reply.

[BobKamman]

Is each trustee relying on what the other one said?  I wouldn't get involved without actually reading the trust document.  

Maybe it's just a plain vanilla trust with a beneficiary who happens to be a child with special needs.  Similar to a "grumpy old man trust."  

[Jesse57]

As I think about what I've read here and some other research, 

1.  The Trust is a disregarded entity for tax purposes

2.  The income and expense flow through to the Grantor and are to be reported on his personal 1040

3.  The trustee fees of a Grantor trust would be reported in the deductions subject to the 2% floor (similar to investment advisory fees)

4.  The deductions subject to the 2% floor are not currently allowed until 2026.

So I think my answer is while it would be included in the Deductions Subject to the 2% Floor, this will not be deductible until TY26, no deduction for this year (or next)

[sjrcpa]

So client is a young child who set up their own special needs trust which is a Grantor Trust?

Does a young child have the legal capacity to do that?

This is not making sense to me, but what do I know?

[Jesse57]

The child received the funds as settlement of a medical malpractice claim.  Settlement was in favor of the child.  Parents represented him as Guardians and the Trust arrangement was approved by the Judge in the case.

[BobKamman]

And the judge approved a trust that could be revoked by the parents, as guardians? Or amended without going back to court? Unlikely.  I do several returns for such trusts -- the children have become adults, but they are permanently disabled -- and they are irrevocable and filing a 1041.  

[sjrcpa]

Me too.

Have you actually read the Trust Agreement? Echoing Bob.

[BobKamman]

Or is there even a trust document?  Some states have different ways for a court to approve the same thing.  This might be a "constructive trust," based just on a court order.  But then I don't think the term "Special Needs" would be used.  

$22,000 is a lot of trustee fees to throw away as a deduction, unless you are sure of your reasons. And have adequate malpractice insurance, in case you're wrong.  

Also, the investment advisory fees, or a part of them, may be deductible on a 1041. "Fees for investment advice, including any related services that would be provided to any individual investor as part of an investment advisory fee, are incurred commonly or customarily by a hypothetical individual investor and are not deductible. However, certain incremental costs of investment advice beyond the amount that would normally be charged to an individual investor are deductible. An incremental cost is a special, additional charge that is added solely because the investment advice is rendered to a trust or estate rather than to an individual, including balancing beyond the usual varying interests of current beneficiaries and remaindermen. The deductible portion of the investment advisory fees is limited to the amount of those fees, if any, that exceeds the fees normally charged to an individual investor. See Regulations section 1.67-4(b)(4)."