First, distributions from a trust are not taxable to the beneficiaries as long as the trust has paid tax on the income prior to distribution. Trusts can either pay out the trust income and let the beneficiaries pay the tax or the trust can pay the tax. So, no tax document is required from the trust to the beneficiary as long as the trust paid the income taxes on the money distributed to the trustee. You have 3 years of bank statement showing the receipt of this money. That along with a letter from the trustee confirming the start date, regular amounts/frequency of the payments and confirming that the payments will continue for at least 3 years will suffice.
This is a case of a loan officer, processor and underwriter not having a clue as to how to handle your wife's income. Good luck.
Here are some guidelines from one of my investors for this kind of scenario:
The lender must verify that the particular source of income is nontaxable.
■Documentation that can be used for this verification includes award letters, policy agreements, account statements, or any other documents that address the nontaxable status of the income.
■If the income is verified to be nontaxable, and the income and its tax-exempt status are likely to continue, the lender may develop an "adjusted gross income" for the borrower by adding an amount equivalent to 25% of the nontaxable income to determine the borrower's qualifying income.
■NOTE: If 25% exceeds the appropriate tax rate for borrower's income amount underwriting will use the lower tax rate. Additional allowances for dependents are not acceptable.
So the problem is not that it's not taxable it's the ability to "document" that you receive the income in a manner that's acceptable to FHA, VA, USDA, Fannie Mae/Freddie Mac & the investment firms that buy mortgage backed securities on Wall Street.
The acceptable ways to properly document income is through pay stubs, w-2s, 1099s, tax returns, or official awards letters for things like social security disability income. In your case, you would probably need to provide documentation from the Trustee in order for it to be counted.
Please feel free to contact me for more help or information.
Senior Mortgage Banker
Peoples Bank & Trust Co.