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IRS Finalizes Regulations for Estates and Non-Grantor Trusts

October 26, 2020

The IRS has released final regulations concerning non-grantor trusts. The TCJA changed the rules for these trusts, but new guidance alters this. Here are the details.

The Internal Revenue Service has released final regulations to offer guidance on deductions for estates and non-grantor trusts. The IRS clarifies through the guidance that certain deductions are not to be considered miscellaneous itemized deductions. We delve into the new regulations below.

What is a grantor trust?

A grantor trust is a type of living trust, meaning it takes effect during the lifetime of the individual who creates it. A grantor trust is one in which the person establishing the trust (the grantor) retains control over the trust’s income and assets. In many cases a grantor trust does not file a separate income tax return as all the income is reported directly on the grantor’s individual income tax return.

What is a non-grantor trust?

A non-grantor trust, as suggested by the name, is any trust that is not a grantor trust. Non-grantor trusts are treated as a separate entity for Federal tax purposes, so they are required to have their own tax identification number (TIN). Unless distributions are made to beneficiaries, non-grantor trusts must pay taxes on income received. Complex trusts and simple trusts are examples of non-grantor trusts.

TCJA Changes

The Tax Cuts and Jobs Act (TCJA) issued in December 2017 forbids individuals, estates, and non-grantor trusts from claiming miscellaneous itemized deductions for any taxable year starting after December 31, 2017 and before January 1, 2026. Common examples of these previously deductible items are investment expense, tax preparation fees, and some legal fees.

The final rules

The final rules clarify that certain deductions are allowable in calculating adjusted gross income (AGI) and are not considered miscellaneous itemized deductions.

The following are allowable:

  • Deductions for costs paid or incurred in connection with the administration of the estate or trust that would not have been incurred if the property were not held in such estate or non-grantor trust
  • Deduction for the personal exemption of an estate or non-grantor trust
  • Distribution deductions for trusts distributing current income
  • Distribution deductions for trusts accumulating income

Additionally, the final regulations offer guidance on determining the character and amount of (and the manner of allocating) excess deductions that beneficiaries succeeding to the property of a non-grantor trust (or terminated estate) can claim on their individual 1040s.

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