A qualified disability trust (QDT) is a type of trust that qualifies for a specific federal tax exemption and is designed to benefit an individual with special needs. Most special needs trusts qualify as QDTs. The amount of this federal tax exemption changes over time, so staying aware of these changes to take full advantage of that exemption can be critical for individuals with existing QDTs and those who may wish to set up these trusts in the future.
Rubin Law can help you determine the best option to provide for the current and future financial needs of your child with special needs.
Qualified Disability Trusts and the Federal Tax Exemption
Typically, you must pay income tax on income that you receive from the trust. Historically, you also had to pay income tax on income from special needs trusts. A trust reports income on IRS Form 1041 using an employer identification number (EIN), and distributions to a trust beneficiary are reported on their personal 1040 federal income tax return.
However, in 2003, Congress amended 26 U.S.C. § 642(2)(C) to provide a deduction equivalent to the exemption amount for individuals for trusts that meet certain criteria, also known as QDTs. This federal tax exemption can save a great deal of money that otherwise would have to be paid in taxes. For 2023, the federal tax exemption for a QDT was $4,400; for 2024, the federal tax exemption amount increases to $5,050. The practical application of this exemption means that the first $5,050 of income from the trust goes untaxed.
As a side note, the Tax Cuts and Jobs Act suspended the deduction for personal exemptions for the tax years from 2018 to 2025, so individuals currently do not have an individual tax exemption when filing taxes, at least until 2026. However, that same law also states that in any year in which there is no personal exemption, the exemption is still allowable for a QDT.
Eligibility Requirements for QDTs
A trust must meet specific eligibility requirements to qualify as a QDT and, thus, to qualify for the federal tax exemption under the IRC. These eligibility requirements include the following:
- The trust must be irrevocable;
- The beneficiary with a disability must be under the age of 65 at the time the trust is established; and
- The beneficiary must be disabled within the meaning of the Social Security Act. While this definition is complex, it essentially means that an individual is unable to engage in substantial gainful activity as a result of a physical or mental impairment that is expected to last 12 months or more or result in death.
Trusts may qualify as QDTs even if the remainder beneficiaries do not have disabilities. For instance, suppose the trust’s primary beneficiary, an individual with disabilities, passes away, and the trust states that the remainder of the trust proceeds are to go to an individual who does not have disabilities. In this situation, the trust can still qualify as a QDT if it meets all other eligibility criteria.
Contact Us Today to Learn More About a Qualified Disability Trust
Rubin Law is the only Illinois law firm to dedicate itself exclusively to providing compassionate legal services for children and adults with special needs. We offer unique legal and future planning techniques to meet your family’s individual needs.
Call us today at 866-TO-RUBIN or email us at email@rubinlaw.com to learn more about the services we can offer you and your family.
