Qualified Disability Trusts

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Qualified Disability Trusts

A qualified disability trust is any nongrantor trust:

  1. Described in 42 U.S.C.1396p(c)(2)(B)(iv) and established solely for the benefit of an individual under 65 years of age who is disabled, and
  2. All the beneficiaries of which are determined by the Commissioner of Social Security to have been disabled for some part of the tax year within the meaning of 42 U.S.C. 1382c(a)(3).

Who Must File

Form 1041 - U.S. Income Tax Return for Estates and Trusts

  • Any taxable income, OR
  • Gross Income of $600 or more, OR
  • A nonresident alien beneficiary

When to File

  • 15th day of the 4th month after the end of the tax year

Extension:

  • First Extension - Form 8736, 3 month automatic extension
  • Second Extension - Form 8800, 3 month additional extension

Estimated Taxes

Generally follows individual rules:

  • If you expect to owe, after subtracting any withholding and credits, at least $1,000 in tax
  • Safe Harbors of: 90% of current year's tax, OR 100/110% of last year's tax.

Section 643(g) Election

  • The trust can elect under Section 643(g) to allocate part of their estimated payments to beneficiaries.

Exceptions:

  • Section 645 Election - Decedent's Estate rules regarding estimates apply and no estimates are due for the first two years

Amended Return

  • Check the Amended Return box on the front of Form 1041

Final Return

  • The trust is terminated when all assets have been distributed
  • Trusts must have predetermined lives due to the rule of perpetuities. This limits a trust's life to the life of the beneficiaries plus 21 years
  • All capital losses are released in the final year of the return
  • May have an amount on Line 12a of the K-1 "Excess Deductions on Termination" - These should be reported on the Individual Beneficiary's Schedule A
  • Check the Final Return box on the front of Form 1041

Exemption

  • A Qualified Disability Trust is allowed a $3,100 exemption if the trust's modified AGI is less than or equal to $142,700. If its modified AGI exceeds $142,700, the trust will need to complete the Exemption Worksheet for Qualified Disability Trusts found in the Form 1041 instructions to determine the allowed amount of exemption

Passive Considerations

  • Passive Activity Loss Limitations are imposed at the Fiduciary level
  • If a trust distributes an interest in a passive activity, the basis of the property immediately before the distribution is increased by the passive activity losses allocable to the interest. Such losses cannot be deducted
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