By Stephen J. Silverberg
New York Elder Law Attorney

Tax professionals have been losing sleep over The Tax Cuts and Jobs Act (the “Act”). Congress pushed The Act through in three weeks and many of the deductions and exemptions that have been in place for years are gone. This article is not devoted to the requirements to qualify as a QDiST but to examine the effect of the Act on the taxation of the QDiST. Unless otherwise stated, the Internal Revenue Code discussed below are effective January 1, 2018, and expire on December 31, 2025.

The Act eliminates the personal exemption for individuals[1] instead of the personal exemption; the standard deduction increased to $12,000 for individual taxpayers and $24,000 for married couples filing jointly. [2] However, the standard deduction for an individual claimed as a dependent remains the same. The standard deduction claimed by a dependent in 2018 cannot exceed the greater of $1,050 or $350 plus the individual’s earned income up to the standard deduction for unmarried taxpayers. As shown, this remains a major tax break for a QDiST.

However, the Act retains the personal exemption for trusts and estates. The personal exemption for an estate remains at $600. [3]  A simple trust (one that distributes all its income annually) receives an income tax exemption of $300 a complex trust (one that does not distribute or accumulate such income) receives an income tax exemption of $100. .[4]

There is a third type of trust, Qualified Disability Trusts (“QDiST”), created under the Patriot Act in 2001.[5] A QDiST provides a tax benefit if the beneficiary of a non-grantor trust is disabled. Before 2017 QDiST received an income tax exemption equal to the personal exemption available in a particular year ($4,050 in 2017). [6]

However, the Act eliminates the personal exemption for individuals, the $100 and $300 exemptions for complex and simple trusts. However, the Act retains the personal exemption for a QDiST and sets the personal exemption at $4,150[7] indexed for inflation. [8] The QDiST can retain $4,150 tax-free each year creating a fund which for the beneficiary’s future needs.

Normally, distributing income from a trust to a child is subject to the so-called “Kiddie Tax” under IRC §1(g). Implemented by the Tax Reform Act of 1986, the Kiddie Tax taxed unearned income of a child at the higher of the parent’s marginal income tax rate or the child’s marginal tax rate. Unearned income is defined simply as all income not earned income.[9]  Unearned income includes (i) interest, dividends, rents, royalties, and gains from the sale of investment property[10] and (ii) social security and pension benefits paid to the child to the extent they constitute gross income to the child. [11] Earned income is essentially wages, salaries, and other amounts received as compensation for personal services. [12] These provisions remain intact under the Act,

Unchanged by the Act, is the three-prong test used to determine if the Kiddie Tax is applicable. First, the child has not turned 18 years before the close of the taxable year[13]; or the child is a student and has not turned 24 years before the close of the taxable year.[14]  Second, the child must have at least one parent alive as of the close of the taxable year. [15] Finally, the child must not file a joint return for the taxable year. [16] If a child meets these tests, any unearned income more than $2,100 is subject to the Kiddie Tax.

What makes the QDiST attractive, despite the failings of the Act, is the largely unnoticed provision IRC §1(g)(4)(C), added in 2006[17] exempting income from a QDiST form the Kiddie Tax. This section states:

For purposes of this subsection, in the case of any child who is a beneficiary of a qualified disability trust (as defined in section 642(b)(2)(C)(ii)), any amount included in the income of such child under sections 652 and 662 during a taxable year shall be considered earned income of such child for such taxable year.

In a major change, the Act provides the Kiddie Tax be determined using the tax table for trusts and estates instead of the parents’ marginal rate.[18] The new tax rates are:

Kiddie Tax Rates[19]

If Taxable Income is:The Income Tax is
Up to $2,55010% of taxable income
Over $2,550 but not over $9,150$255, plus 24% of the excess over $2,550
Over $9,150 but not over $12,500$1,839, plus 35% of the excess over $9,150
Over $12,500$3,011.50, plus 37% of the excess over $12,500.

A child receives a standard deduction of $1050.[20]  If the child’s unearned income is over $1,050, the unearned income over $1,050 the income tax is determined using the child’s income tax rate of 10% on the next $1,050 of unearned income. If the child’s unearned income is over $2,100, unearned income over $2,100 is taxed using above table).

If the child is a beneficiary of a QDiST, their income tax is calculated using the tax table for single individuals.

QDiST Beneficiary Individual Tax Rates[21]

If taxable income is:The tax is:
Up to $9,52510% of taxable income
Over $9,525 but not over $38,700$952.50 plus 12% of excess over $9,525
Over $38,700 but not over $82,500$4,453.50 plus 22% of the excess over $38,700
Over $82,500 but not over $157,500$14,089.50 plus 24% of the excess over $82,500
Over $157,500 but not over $200,000$32,089.50 plus 32% of the excess over $157,500
Over $200,000 but not over $500,000$45,689.50 plus 35% of the excess over $200,000
Over $500,000$150,689.50 plus 37% of the excess over $500,000

The above amounts do not include the $4,150 trust exemption retained in the trust The IRS treats unearned income paid to or used to benefit the beneficiary of a QDiST as earned income for all income tax purposes and EXEMPT from the Kiddie Tax.[22] As a result, the QDiST beneficiary is eligible for a standard deduction equal to the greater of (i) $1,050 or (ii) the child’s income + $350 up to the individual standard deduction for a single person up to $12,000, indexed for inflation.[23] If there is a concern the income distributed to the beneficiary, the distributed income can be contributed to a Medicaid payback trust if the beneficiary is under 65 years old. If the QDiST retains the $4,150 trust exemption each year and earns a 7% return, at the end of the fourteen year period, there will be a fund of over $95,000 to be used for the beneficiary’s future needs


  1. Jane is fourteen years old and receives $1,800 from a non-grantor trust. Her taxable income is $750 ($1,800 less the standard deduction of $1,050). Her income tax due is $75 based on her tax rate of 10%.

2          Robert is 20 years old and is a student. A non-grantor trust established by his grandfather distributes $2,300 to him. His taxable income is $1,200 ($2,300 less the standard deduction of $1,050). The income tax on the first $1,050 at his tax rate of 10%, and the remaining $150 of income is taxed using the trust tax rate of 10%. His total income tax due is $120.

  1. Same facts as two but Robert receives $5,000. His taxable income is $3,950. The tax rate for the first $1,050 of income is 10%. The trust tax rate of 10% applies to the next $1,500 of income.

Since Robert’s remaining income exceeds $2,550, the upper limit of the new Kiddie Tax10% bracket, the income tax on the remaining $1,400 of income uses the 24% tax rate. Robert’s total tax due is $591.

Based on the new tax table, married individuals filing a joint income tax return reach the 37% bracket for income over $600,000. Unmarried individuals reach the 37% bracket for income over $500,000. Under the new Kiddie Tax rates, the tax on all income over $12,500 is 37% of the income more than $12,500. Under the Act, it is possible for a child to pay more income tax than their parents even though the child’s total income is less than their parents.


Like ordinary income, the tax rate on capital gains is substantially lower for the beneficiary of a QDiST. The capital gain tax brackets are:


Kiddie Tax Rates[24]

If Income is:Capital Gain Tax Rate
Up to $2,6000%
$2,601 to $12,70015%
Over $12,70020%

QDiST Beneficiary Tax Rates[25]

If Income is:Capital Gain Tax Rate
Up to $38,6000%
$38,601 to $425,80015%
Over $425,80020%

There would be no capital gains tax if a beneficiary of a QDiST receives a $37,000 capital gain distribution. A beneficiary from a conventional trust incurs a tax liability of $7,400.


While there are several applications of this increased exemption, the QDiST is a perfect vehicle as the beneficiary of an IRA intended to benefit the minor child. The minimum distributions initially are so low; they would have little or no effect on benefits received by the beneficiary. Over the years, the tax-free accumulation of the IRA will yield a substantial amount for the beneficiary’s later needs.

Assume a grandparent passes away and names a trust for the benefit of a granchild with special needs the Designated Beneficiary of $750,000 of his IRA. The grandchild is ten years old when RMD’s commence. The trust beneficiary is a student until she is twenty-four years. The annual rate of return of the IRA is 7 %. What follows are three scenarios:

  1. RMD’s commenced in 2017, and the trust qualified as a QDiST, and the prior law is unchanges;
  2. RMD’s commence in 2018, and the trust qualifies as a QDiST under current law;
  3. RMD’s commence in 2018, and the trust is a not a QDiST and subject to Kiddie Tax. The trust is conventional IRA conduit trust (the results are essentially the same if the trust is an accumulation trust since the Kiddie Tax rates equal to the trust and estate tax rate.
AgeRMDTrust ExemptionBeneficiary’s Gross IncomeBeneficiary’s Standard DeductionBeneficiary’s Net IncomeIncome Tax
TOTALS$258,884.16$60,750.00$319,634.16 $182,384.16$21,007.86

Under the QDiST rules in effect in 2017, the trust beneficiary will have an income tax liability of $21,007.86 or 8.11% of the total of all RMD’s The cost is offset since the QDiST can accumulate $4,050 each year tax-free creating a fund of $60,750.00. If the exemption amount is invested and appreciates 7% per annum, the fund will be worth over $90,000. Finally, the parents’ have a $4,050 personal exemption for the trust beneficiary, which can lessen the impact of the Kiddie Tax.

AgeRMDTrust Personal ExemptionGross IncomeStandard DeductionTaxable IncomeIncome Tax
TOTALS$258,884.16$62,250.00  $40,528.72$4,053.70

For 2018, the personal exemption of the trust increases to $4,150 (indexed for inflation). The elimination of the trust beneficiary’s personal tax exemption is made up by the increase of the standard deduction to $12,000. Under the Act, the the tax liability of the trust beneficiary over the same fourteen-year period is $4,053.70, only 1.57% of the of the total RMD’s paid and 80% less income taxalmost than under the prior QDiST tax regime. If the $$,150 If the $4,150 trust exemption amount remains in the QDiST and grows at annually 7%, creating a $95,000 fund to use for future benefits.

Contrast the QDiST results to a standard IRA accumulation trust:

AgeRMDTrust ExemptionGross IncomeStandard DeductionTaxable IncomeIncome Tax at BeneficiaryRateTaxable Income Subject to Kiddie TaxKiddie TaxTotal Income Tax
TOTAL$258,884.16$4,500.00  $238,634.16$1,575.00 $67,205.93$68,780.93

With only a $1,050 standard deduction and a $300 trust tax exemption, the federal income tax liability is $68,780.96 or 26.57% of the RMD’s paid

As the result of eliminating many deductions and exemptions, the Act has made the QDiST a more important planning tool. Most third party Special Needs are grantor trusts, so the Grantor, usually a parent or other relative, is taxed on income generated by the trust. Under the Act, any new third-party Trust should probably not be a grantor trust, so it can qualify as a QDiST.

Additionally, Elder Law practitioners must re-examine all existing third-party grantor trusts and determine if terminating the grantor trust status to take advantage of the substantial income saving available under the Act.

[1] IRC 151(d)(5)(A)

[2] IRC 63(c)(7)

[3] IRC §642(b)(1)

[4] IRC §642(b)(2)(A) and (B)

[5] Adding IRC §642(b)(2)(C)

[6] IRC §151(c)

[7] IRC § 642(b)(2)(C)(iii)(I)

[8] IRC § 642(b)(2)(C)(iii)(II)

[9] IRC §1(g)(4)(A)(i) 

[10] Reg. §1.1(i)-1T, Q&A-6

[11] Reg. §1.1(i)-1T, Q&A-9

[12] IRC §911(d)(2)

[13] IRC §1(g)(2)(A)(i)

[14] IRC §1(g)(2)(A)(ii)(I)

[15]IRC §1(g)(2)(B)

[16] IRC §1(g)(2)(C)

[17] Tax Increase Prevention and Reconciliation Act of 2005 §510

[18] IRC §1(j)(4)(B)

[19] IRC §1(j)(2)(E)

[20] IRC §63(c)(5)

[21] IRC §1(j)(2)(C)

[22] IRC § 1(g)(4)(C)

[23] IRC §63(c)(7)(A)(ii)

[24] IRC §1(j)(5)

[25] IRC §1(j)(4)

About the Author
Stephen J. Silverberg is nationally recognized as a leader in the areas of estate planning, estate administration, asset preservation planning, and elder law. He is a past president of the prestigious National Academy of Elder Law Attorneys (NAELA), and a founding member and past president of the New York State chapter of NAELA.
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