Key Decisions for Trust and Estates

The elimination of Miscellaneous Itemized Deductions that are subject to the 2% floor under the Tax Reform Act applies to Estates and Trusts. This includes Tax Preparation fees (unless they can be allocated to Schedules C, E, or F), Fiduciary fees, Investment advisory fees, or Asset management fees.

There is an exception to the 2% floor for Administrative costs that are paid or incurred by an Estate or Trust and that wouldn’t ordinarily have been incurred if the property weren’t held in an Estate or Trust. This is an important distinction because Estates and Trusts can incur large Tax Preparation and Fiduciary fee expenses for the management of Estate or Trust assets. To this point, the IRS has released proposed regulations that confirm the tax reform act elimination of Miscellaneous Itemized Deductions does not eliminate expenses that were previously deductible under IRC §67E.

Therefore, for tax years beginning after 12/31/2017, administrative expenses are still fully deductible on Fiduciary returns. The regulations also state that the appropriate portion of bundled fees is still deductible. So, if a portion of the fee is attributable to Administrative expenses, then it is still deductible.

Prior to the tax reform act, in the Final year of an Estate or Trust, beneficiaries were also generally allowed to take deductions in excess of 2% of gross income on their 1040. For tax years beginning after 12/31/2017, these deductions are no longer allowed. Trustees and Executors should consider when to pay expenses in order to avoid lost deductions. For example, it might be beneficial to prepay the cost of preparing the final Estate or Trust tax return in a year prior to the final distribution if the deduction for that expense would otherwise be lost.

The proposed regulations don’t clarify this issue, but they do state that final regulations will address the ability of beneficiaries to deduct expenses that would have been deductible on the Estate’s or Trust’s tax return after the termination of the Estate or Trust. But, as of now, there is no timeframe for when these final regulations will be available

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