Qualified Disability Trust

Technical topics regarding tax preparation.
#1
Posts:
54
Joined:
12-Feb-2020 2:57pm
Location:
Hawaii
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?
 

#2
Leon033  
Posts:
5
Joined:
20-Oct-2021 1:16pm
Location:
CA
I just had a client bring one of these in. First-year for the trust, and apparently no one reputable in my area is taking on new clients like this. Did you ever sort this out? I'm leaning toward your 1) and 2) both being "yes", that the trust pays taxes on all income except for what was distributed on behalf of the beneficiary, reported via K-1, but I'm a little confused as well.

My trust has income below the exemption amount, so my assumption is 1041 with no income, and a blank k-1 to the beneficiary, even though the beneficiary received distributions.
 

#3
Anderly  
Posts:
213
Joined:
17-Oct-2015 6:47pm
Location:
Nebraska
In the first example the investment advisory fee is not a distribution paid on the beneficiary's behalf, it is an expense of the trust (non deductible, but trust expense)
Trust pays taxes on all income in excess of the ordinary income distributed to the beneficiary. Generally the capital gains are taxed to the trust, they are not usually considered distributable income.
When you say "my trust has income below the exemption amount" this doesn't mean that it doesn't get reported. If there is ordinary income and distributions, the K-1 will show the income and the exemption will "go to waste".
 


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