Fundamentals of a Qualified Disability Trust (QDT)

What Is a Qualified Disability Trust?

A Qualified Disability Trust is a type of irrevocable trust designed for a person who qualifies as disabled under the Social Security Act (42 U.S.C. § 1382c(a)(3)). It is most commonly used in special needs planning, allowing parents or family members to leave assets to a disabled beneficiary without jeopardizing their eligibility for government benefits like Supplemental Security Income (SSI) or Medicaid.

Under Internal Revenue Code § 642(b)(2)(C), a QDT is granted a larger personal exemption than most other trusts—an important tax benefit that helps preserve more funds for the disabled person’s care.

Eligibility Requirements for a QDT

To qualify as a QDT, the following conditions must be met:

1. The trust must be irrevocable.
   Once created, it cannot be changed or revoked by the grantor.

2. The beneficiary must be disabled.
   The individual must meet the definition of “disabled” as described in the Social Security Act.

3. The trust must be established for the benefit of one or more disabled individuals.

4. The beneficiary must be under age 65 when the trust is funded.
   Assets added after age 65 could affect Medicaid eligibility.

5. The trust must make a proper election each year to be treated as a Qualified Disability Trust for tax purposes.

Key Tax Benefits

Unlike most irrevocable trusts—which are taxed at the highest federal income tax rate after earning just a few thousand dollars—a QDT enjoys a significant income tax exemption.

• For 2025, the personal exemption amount for a QDT is approximately $4,700 (adjusted annually for inflation).

• This exemption reduces the trust’s taxable income and can save thousands of dollars over time, especially if the trust generates investment income.

In comparison, a typical trust only qualifies for a $100 or $300 exemption—making the QDT much more tax-efficient.

Coordination with Other Planning Tools

A QDT can work in harmony with other estate planning instruments:

• Special Needs Trust (SNT): A QDT can be structured as a third-party SNT, ensuring the disabled beneficiary retains eligibility for SSI and Medicaid.

• Pooled Trusts: For smaller estates, a pooled trust managed by a nonprofit can be used alongside a QDT for administrative ease.

• Powers of Attorney and Advance Directives: Ensuring the disabled person’s financial and healthcare decisions are consistently protected.

Practical Example

Imagine a mother who wants to leave $250,000 to her adult son with a disability. Placing the funds directly in his name would disqualify him from SSI and Medicaid. Instead, she establishes a QDT, appoints a trustee to manage the funds, and makes the annual QDT election for tax purposes. The trust supports her son’s supplemental needs—transportation, therapy, education, and recreation—without affecting his government benefits or facing excessive trust taxation.

Pitfalls to Avoid

• Missing the annual QDT election can cost the trust its favorable tax status.

• Funding errors—such as adding assets after the beneficiary turns 65—may cause Medicaid issues.

• Mixing beneficiaries (disabled and non-disabled) in the same trust disqualifies it as a QDT.

It’s vital to coordinate with both an estate planning attorney and a tax professional to ensure ongoing compliance.

Why QDTs Matter

For families with disabled loved ones, a QDT is more than a tax shelter—it’s a lifeline of financial stability. It ensures funds are preserved, used wisely, and taxed fairly, allowing caregivers and trustees to focus on what truly matters: the individual’s quality of life.

Final Thought:
A Qualified Disability Trust sits at the intersection of tax law and compassion. It’s a strategic and humane way to safeguard both financial and emotional security for those who need it most.