Income Taxation of Special Needs Trusts, Part 2

Income Taxation of Special Needs Trusts, Part 2

In your future planning for your child with special needs, remember to consider income taxation of special needs trusts, including Qualified Disability Trusts (QDTs). If you set up a special needs trust (“SNT”) with another law firm, the attorneys may not have discussed how to file taxes for that trust and how much it might owe.

Qualified Disability Trusts are trusts that meet some specific IRS requirements. For example, a QDT must:

  • Have beneficiaries who are receiving SSI or SSDI benefits
  • Not be a grantor trust
  • Benefit one person with special needs under age 65

Third-party special needs trusts (SNTs) are generally not grantor trusts, especially after both parents of the child with special needs are no longer living, and can qualify for QDT status. Self-settled SNTs, however, are taxed as a “grantor trust” to the child with special needs

It matters whether a trust is a QDT because QDTs may receive different tax benefits. Usually, trusts considered “complex” can take only a $100 tax deduction under IRS rules. The special QDT rules used to allow a trust that meets all the QDT requirements to take a deduction equal to the amount of the personal exemption. In 2017, the personal exemption was $4,050. 

As you may have heard, the changes to the tax laws effective in 2018 eliminated the personal exemption in favor of increasing the standard deduction. But fortunately, a new law allows QDTs to take a $4,150 deduction when the personal exemption is $0. This is great news for people who benefit from QDTs, as their trusts will still get the yearly deduction. The law even allows for an increase in the $4,150 deduction amount every year.

In short, qualifying as a QDT may help a trust save thousands of dollars on taxes each year because of the available deduction.

Rubin Law is the only law firm in Illinois exclusively limited to providing compassionate special needs legal and future planning to guide our fellow Illinois families of children and adults with intellectual disabilities, developmental disabilities, or mental illness down the road to peace of mind. For more information, email us at or call 866-TO-RUBIN.