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When Is a Special Needs Trust Considered a Qualified Disability Trust for Federal Income Tax Purposes?

April 8, 2010

Many Special Needs Trusts established by persons other than the disabled beneficiary have in the past been treated as “complex” trusts for federal income tax purposes, and allowed only a $100 personal exemption.  That means that if the trust had undistributed income in excess of $100, there would be federal income taxes due.  A federal tax law that became effective in 2001 provided a tax break for some Special Needs Trusts, so that if the trust meets the definition of Qualified Disability Trust, it would qualify for the higher personal exemption, which on a 2009 federal income tax return is $3,650.

(This exemption can be lost in the event that the “modified adjusted gross income” of the Special Needs Trust is over $166,800.  If you’re now wondering who that would apply to, you have read my mind; many of the Special Needs Trusts I have seen don’t even have that amount in assets, let alone in annual income.)

To qualify as a Qualified Disability Trust, the trust must be established and funded by an estate or someone other than the disabled beneficiary, and before the beneficiary attains the age of 65 years.  The special needs beneficiary must be receiving SSI or SSDI benefits at the end of the tax year.  Unfortunately, if a beneficiary is a disabled federal or state retiree who doesn’t receive benefits from the Social Security Administration, the trust doesn’t qualify as a Qualified Disability Trust.

If a Special Needs Trust has more than one beneficiary, the tax result is not absolutely clear.  The apparent intention of the tax law is that there can be more than one beneficiary as long as they are all receiving SSI or SSDI benefits.  Unfortunately, a general problem with this tax law is that it points vaguely to a Medicaid law which describes transfers that do not disqualify a person who applies for Medicaid, and the Special Needs Trust provision in that Medicaid law has been interpreted by the Social Security Administration as requiring only one disabled beneficiary per trust.  For practical purposes, however, it seems that this negative interpretation of the sloppy tax law is being ignored, and Special Needs Trusts established and funded by estates or persons other than the disabled beneficiary are being treated as Qualified Disability Trusts.

3 Comments leave one →
  1. Nick permalink
    April 15, 2012 5:33 pm

    1. Is the Special Needs Trust allowed to claim Qualified Disability Trust status in the year in which the beneficiary turns 65?

    2. What status is appropriate after the beneficiary reaches age 65?

    Thanks!

    • April 16, 2012 11:47 am

      Sorry, but this blog is not intended to give legal advice to anybody. You should obtain specific advice geared to your own particular situation from an elder law attorney or special needs attorney in your state.

  2. Anne permalink
    March 15, 2014 6:14 pm

    I do not think an oridnary trustee would have a clue about these types of laws; what is your general opinion of “a bank SNT” ? Wouldn’t a bank SNT have a better tax understanding ?

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