What is a preferred beneficiary election and how does it help a trust for a disabled beneficiary?

A preferred beneficiary election is a joint election a trust and an eligible beneficiary can file that lets trust income be taxed in the beneficiary's hands, using their own tax bracket and credits, even though the income is kept inside the trust rather than actually paid out to them. It's aimed at situations where paying money directly to a beneficiary isn't practical or appropriate, most commonly a beneficiary who is eligible for the disability tax credit and may need the trust to retain funds for their care rather than distributing cash they can't manage themselves.

For a family with a disabled beneficiary, this can let the trust take advantage of the beneficiary's personal tax credits and lower bracket on income the trust is going to retain for their long-term benefit anyway, without triggering the practical and benefits-eligibility problems that would come from actually paying that money out to them directly. It's a narrower, more flexible tool than converting the whole trust to a qualified disability trust, and the two elections work differently, so which one, or both, makes sense depends on the trust's terms and the beneficiary's situation.

Because eligibility and the election itself have specific conditions, this needs to be reviewed with a tax advisor familiar with disability trust planning.