I want to thank my esteemed colleague Natalie Choate, who included the strategy I uncovered and developed in the latest edition of her book “Life and Death Planning for Retirement Benefits” (available at https://www.ataxplan.com or Amazon). Natalie is the national leader in planning for retirement benefits from qualified plans and IRA accounts; I am honored to call her a friend. Natalie was gracious enough to review the pre-publication version of my article “A Clear Winner in the Tax Cuts and Jobs Act of 2017: Qualified Disability Trusts.” The article, which was published in the Tax Section of NAELA News Online, explored a wrinkle in the new tax law.
A Qualified Disability Trust (“QDisT”) is a non-grantor trust for a disabled beneficiary. The Tax Cuts and Jobs Act of 2017 (the “Act”) greatly enhances the income tax benefits for a beneficiary of a Qualified Disability Trust (QDisT). This especially true if the beneficiary is a minor or a student under twenty-five; income from a QDisT is exempt from the Kiddie Tax and taxed at the beneficiary’s income tax rate that substantially lower than the trust income tax rate or the beneficiary’s parents’ income tax rate (used for years before 2018).
Additional income tax benefits of a QDisT include:
- A trust income tax exemption of $4,150 (indexed for inflation). The income tax exemption for other trusts is $100 or $300 depending on the trust. A QDisT can retain the exemption each year income tax-free.
- The beneficiary of a QDisT can claim an income tax standard deduction of up to $12,000. Previously, if the parent of trust beneficiary claimed the beneficiary as a dependent on the parent’s income tax return, the maximum allowable standard deduction was $1,050. When combined with the trust income tax exemption, the first $16,150 of income is income tax-free.
As a result of the Act eliminating many deductions and exemptions, the importance of the QDisT as a planning tool is greatly enhanced. Most third-party SNT’s are grantor trusts. The grantor, usually a parent or other relative is taxed on income generated by the trust, wasting the trust exemption and child’s standard deduction.
Due to the changes in the Act, the Elder Law and Special Needs Planning attorney must discuss with clients the benefits of a QDisT to preserve their tax benefits. It is important for Elder Law and Special Needs Planning attorneys to re-examine existing third-party grantor trusts and consider the benefit of terminating the grantor trust status or decanting the trust to take advantage of the substantial income tax saving under the Act.
Read the complete article here: Tax Section of NAELA News Online.