9090 / What special tax treatment applies to a trust if it qualifies as a qualified disability trust?

Generally, this means that the trust’s adjusted gross income is determined in the same manner as if it were an individual, except that deductions for costs and expenses in trust administration that would not have been incurred were the assets not held in trust are allowable.³ Further, the deduction for trusts that distribute current income only⁴ and the deduction for trusts that accumulate income or distribute trust principal⁵ may be allowed, as relevant.

Because of these provisions, qualified disability trusts are typically much more favorable from a tax perspective than a standard irrevocable trust, which receives a much lower annual exemption than the personal exemption available to individuals. However, in some cases (often depending upon the taxpayer’s income tax bracket and the needs of the beneficiary), it may be more advantageous to structure the trust as a grantor trust, where the tax liability “flows through” to the grantor of the trust.

For a discussion of the ABLE account rules that allow taxpayers to create savings accounts for disabled individuals without jeopardizing qualification for Social Security and Medicaid benefits, see Q 386.