Had a new client come in with a Qualified Disability Trust. Scanned past 5 years of tax returns and income was less than the exemption amount with the same refund carried over each year.
I have not done this type of trust return so does anyone with experience with these trusts? Based on what I gather, the income is "distributed" via a K-1 to the beneficiary if the funds are used for housing and care and is in excess of the income and the exemption amount of $4.3K for 2020.
In 2020, investments yielded around $30K in capital gains and around $2K in dividends; so, first time in 5 years that the income exceeded the deductions and exemption amount. The rent paid on behalf of the beneficiary was $6.5K, investment advisory fee was $1,500 and the prior tax preparation fee was $500 for a total of $8.5K paid on beneficiary's behalf.
On the tax return, I'll currently show a taxable income of $27.2 which is the $2K dividends + $30K capital gains - $500 tax prep fee - $4.3K exemption.
The places I getting myself confused are:
1) that I would typically have a trust "retain" all the capital gain and pay the taxes on it. Is that the same for a qualified disability trust?
2) Do I distribute via K-1 up to the $8.5K paid on behalf of the beneficiary?