The IRS classifies some special needs trusts as Qualified Disability Trusts, and these trusts have certain tax benefits. QDTs may claim a personal exemption on their federal income tax returns. Please note, as part of the Tax Cuts and Jobs Act of 2017 the personal exemption was temporarily eliminated; however, a specific provision of that Act allows QDTs to use whatever amount the personal exemption would have been in that taxable year, regardless of the elimination of the personal exemption for ordinary taxpayers. As a result, QDTs that generate income less than the personal exemption amount will have no tax liability. Even if a QDT has income above the personal exemption amount, usually that excess income can be passed through to the trust beneficiary who then will claim his or her own personal exemption. For the 2017 tax year, the personal exemption is $4,050.
In addition to receiving the personal exemption, QDTs can deduct expenses. Trusts that are earning a consistent income stream, that have some trust management expenses to deduct, and that are paying few medical or other expenses of the beneficiary via distributions will likely benefit from the QDT election.
Internal Revenue Code § 642(b)(2)(C) specifies which trusts may receive the Qualified Disability Trust designation and claim the personal exemption amount. These trusts must meet the description listed in the Social Security Act § 1917(c)(2)(B)(iv) (42 U.S.C. § 1396p) – meaning trusts that qualify as special needs trusts (SNTs). Also, all of the beneficiaries of the trust must have been classified as “disabled” by the Social Security Administration for at least part of the year. Trusts may be QDTs even if its remainder beneficiary – meaning the new beneficiary if the original beneficiary passes away – does not have special needs. (26 U.S.C. § 642(b)(2)(C)(ii)(II).)
As detailed in the previous article on taxation of SNTs, trustees of SNTs must generally file taxes each year for the trust on a Form 1041. QDTs have tax benefits beyond those of other SNTs because they can receive the personal exemption amount.
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 firstname.lastname@example.org or call 866-TO-RUBIN.