Expertise Beyond the Numbers

The TCJA Impact on Estate and Trust Miscellaneous Deductions

The Tax Cuts and Jobs Act (TCJA), enacted in December 2017, has been the most significant legislation to overhaul the tax system in years. While the changes to estate and trust taxation are minimal as compared to business and individual changes, there could still be a notable impact for some fiduciaries. The biggest change for estates and trusts are in regards to the deductibility of certain expenses. The TCJA was vague on the applicability of changes to estates and trusts but the IRS just released Notice 2018-61 to provide some clarification and state that they intend to issue regulations.

Under prior tax law, a fiduciary could deduct most expenses incurred by an estate or trust against the income. These expenses included interest, state income and property taxes, trustee fees, attorney and accounting fees and other miscellaneous deductions incurred by the trust such as fees to maintain property in the trust, investment advisor fees and administration expenses.

The TCJA suspended the deduction for miscellaneous itemized deductions for individuals until 2025. The issue for estates and trusts is that the fiduciary tax laws follow individual tax law, unless explicitly exempted. Since the Act did not provide any explicit exemptions, the deductibility of many of the fiduciary deductions was uncertain.

The IRS’s Notice 2018-61 clarifies that an estate or trust may continue to deduct expenses incurred in the administration of an estate or trust, which would not otherwise be incurred if the property were not held in such estate or trust. For example, investment advisor fees are incurred whether an estate or trust holds a brokerage account or whether an individual holds the brokerage account outright. Therefore, under the TCJA, estates and trusts can no longer deduct investment advisor fees. However, trustee fees, attorney fees, accounting fees and some other administration expenses such as appraisal fees, for example, incurred by an estate or non-grantor trust would still be deductible.

Another issue that the IRS needs to clarify is whether a beneficiary will still be able to deduct final year expenses upon the termination of an estate or trust.  Previously, these final year expenses pass through as a miscellaneous itemized deduction for an individual. Since the TCJA suspended miscellaneous itemized deductions for all individuals, the IRS has yet to confirm if the deduction will be lost or if there will be a means for the beneficiary to still take the deduction. Any net operating losses and capital loss carryovers that are passed through to a beneficiary upon an estate or trust termination will still be deductible at the individual level. At this time, we will need to wait for the IRS to release the final regulations to provide further guidance as indicated in the Notice.