The ramifications of the recently enacted Tax Cuts and Jobs Act of 2017 are far ranging. While the full details of the new tax law are still being sorted out, and many provisions lack clear guidance from the IRS, it appears that one area that will almost certainly be impacted is trusts and estates, which are likely to see higher income tax bills.
Some of the more visible and immediate changes are:
- Because trusts and estates are subject to the same income and reporting rules as individual taxpayers, the elimination of many deductions for individuals will also affect trusts and estates, but without the off-sets the tax law has put in place for individuals
- Tax rate changes for trusts and estates are minimal, and the increase in the standard deduction has no effect, as trust and estates are not eligible for a standard deduction
- Miscellaneous itemized deductions allowed under Section 67 (subject to a 2% floor) have been eliminated altogether, at least until tax year 2025
- For trusts and estates that pay trustee/executor fees, this will eliminate a significant deduction
- However, there is some question as to whether fiduciary specific expenses (such as trustee/executor fees) will be classified as “miscellaneous,” which could allow certain fees and expenses to be deducted
- While the deduction for state and local taxes (including income taxes, real estate taxes, and personal property taxes) has been capped at $10,000 total, the new tax law offers an exception for expenses for the production of income, which may apply to trusts and estates holding assets (including real property) for investment purposes
For trusts/estates on a calendar year, distributions made between January 1 and March 5, 2018 may be eligible for the “65 day” election to treat the distribution as a 2017 distribution, rather than 2018 distribution. This time period could provide some planning opportunities to select the tax year, and tax consequences for pending distributions. As an example, if contemplating a distribution to a beneficiary, consider (both from the trust side and the beneficiary side) whether it’s better for the distribution to occur in tax year 2017 or 2018. Distribution may be better in 2018, if a trust’s tax rate will be higher in 2018 than in 2017, but a beneficiary’s tax rate stays relatively the same, or is in fact lower in 2018.
There is some good news for trusts and estates in the new tax law. Deductions for interest remain the same, charitable distributions for amounts specifically payable or allocable to the charity will be deductible, and depreciation/depletion expenses can be deducted. Still up in the air are tax preparation fees for Form 1041, legal fees for trust or estate administration, the trustee/executor fees cited above, and the deduction of state personal and real estate taxes over $10,000 that are directly related to “federally taxable investments.”
The Tax Cuts and Jobs Act of 2017 is a complex and comprehensive overhaul of our federal tax laws. While the clock is ticking on many decisions, it is unwise to proceed without advice and guidance from a qualified tax professional. If you have any questions about how the new tax law will affect trusts and estates, or any other tax questions, please contact our Tax Department at (781) 407-0300.