What is a Qualified Trust?

A qualified trust is a trust arrangement in which the life expectancy of the beneficiary plays a major role in determining how funds are distributed by the trust administrator. The consideration of life expectancy helps to establish what is known as the required minimum distribution, or RMD, and guides the administrator in disbursing monthly allowances to a beneficiary, or making regular contributions to a retirement plan established by or for the beneficiary. There are restrictions on how a trust can be qualified, especially in relation to the status of the beneficiary, or the status of the retirement plan that is to receive the disbursements.

While there are similar trust situations found in many countries around the world, the identification of a qualified trust is usually associated with the creation and management of trust agreements in the United States. As such, the structure of the trust must comply with regulations put in place by the Internal Revenue Service (IRS). Compliance with IRS standards helps to ensure that the disbursements made to retirement funds or accounts are not subject to the same taxes as disbursements that are made in the form of a monthly allowance to a beneficiary of the trust.

Different types of trusts may be designated as qualified trusts, assuming they meet the IRS standards in regards to validity. This means that the qualified trust must be structured according to standards set by the IRS, and must be managed according to guidelines provided by the tax agency. Should the trust fail to meet those standards, then it is not likely to enjoy favorable tax advantages. As a result, the beneficiary would be subject to paying taxes on any disbursements, even those made to retirement plans approved by the IRS.

A trust must also meet standards of irrevocability in order to attain the status of qualified. This means that the assets within the trust cannot be moved at will in and out of the trust arrangement. The stability of the qualified trust means there will be no question about the status of any disbursements from the trust, since the assets used to generate the profits for those disbursements are the same from one tax period to the next.

One factor that sets a qualified trust apart form other forms of estate planning is the consideration of the life expectancy of the beneficiary. By taking this factor into account, it is much easier to correlate the relationship between the projected earnings from the trust assets and the number of years that those earnings will be used to provide financial support for the beneficiary. Calculating this relationship helps to establish the RMD, and make it possible to set a minimum that will be disbursed from the trust each calendar year. This does not prevent the trust from issuing more funds in a given year, if the amount of return on the assets make that possible. The establishment of the RMD does help set a minimum amount that the beneficiary can reasonably expect to receive directly or as a deposit into an approved retirement plan over the course of that year.