Funds may flow from one trust to another trust by way of rental agreements, fees for services, purchase agreements, and distributions. Some trusts may hold interests in other trusts, purport to involve charities, or are foreign trusts. These arrangements frequently involve more than one trust, each holding different assets of the taxpayer (for example, the taxpayer's business, business equipment, home, automobile, etc.). These promised benefits are inconsistent with the tax rules applicable to trust arrangements.Ībusive trust arrangements often use trusts to hide the true ownership of assets and income or to disguise the substance of transactions. The promised benefits may include reduction or elimination of income subject to tax deductions for personal expenses paid by the trust depreciation deductions of an owner's personal residence and furnishings a stepped-up basis for property transferred to the trust the reduction or elimination of self-employment taxes and the reduction or elimination of gift and estate taxes. Abusive trust arrangements are typically promoted by the promise of tax benefits with no meaningful change in the taxpayer's control over or benefit from the taxpayer's income or assets. Schedule K-1 (Form 1041) is used to notify the beneficiaries of the amounts to be included on their income tax returns.īefore preparing Form 1041, the fiduciary must figure the accounting income of the estate or trust under the will or trust instrument and applicable local law to determine the amount, if any, of income that is required to be distributed, because the income distribution deduction is based, in part, on that amount.Ĭertain trust arrangements claim to reduce or eliminate federal taxes in ways that are not permitted under the law. The income distribution deduction determines the amount of any distributions taxed to the beneficiaries.įor this reason, a trust or decedent's estate is sometimes referred to as a “pass-through entity.” The beneficiary, and not the trust or decedent's estate, pays income tax on their distributive share of income. To figure this deduction, the fiduciary must complete Schedule B. A trust or decedent's estate is allowed an income distribution deduction for distributions to beneficiaries. Most deductions and credits allowed to individuals are also allowed to estates and trusts. See Grantor Type Trusts, later, under Special Reporting Instructions.Ī trust or decedent's estate figures its gross income in much the same manner as an individual. If the trust instrument contains certain provisions, then the person creating the trust (the grantor) is treated as the owner of the trust's assets. A trust may be created during an individual's life (inter vivos) or at the time of their death under a will (testamentary). A decedent's estate comes into existence at the time of death of an individual. Deductions for trusts accumulating incomeįinally, the guidance clarifies how to determine the character, amount and manner for allocating excess deductions that beneficiaries succeeding to the property of a terminated estate or non-grantor trust may claim on their individual income tax returns.įor more information about this and other TCJA provisions, visit IRS.gov/taxreform.Income Taxation of Trusts and Decedents' EstatesĪ trust or a decedent's estate is a separate legal entity for federal tax purposes.Deductions for trusts distributing current income.Deductions concerning the personal exemption of an estate or non-grantor trust.Costs paid or incurred in connection with the administration of the estate or trust which would not have been incurred otherwise.Specifically, the proposed regulations clarify the following deductions are allowable in figuring adjusted gross income and are not miscellaneous itemized deductions: The Tax Cuts and Jobs Act (TCJA) prohibits individual taxpayers from claiming miscellaneous itemized deductions for any taxable year beginning after December 31, 2017, and before January 1, 2026. WASHINGTON - The Internal Revenue Service today issued proposed regulations that provide guidance for estates and trusts clarifying that certain deductions of estates and non-grantor trusts are not miscellaneous itemized deductions.
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