Has IRS issued clarification on 67 (e) (1) regarding final estate & trust costs are not misc deductions; therefore can be deducted on beneficiary’s return?

[tagteam]

They need to fix the issue for estates and non-grantor trusts that have excess deductions that are passed through to beneficiaries (on Line 11A).

Beyond the foregoing, we can argue whether this has any impact in other scenarios but it is doubtful Intuit will fix the issue one way or the other.

[maglib]

removed

[maglib]

OK the whole thing is deductible on the 1041 not the 1040.....  that's the issue.  

[tagteam]

Worth reading through, at least once:

<a rel="nofollow" target="_blank" href="https://www.aicpa.org/content/dam/aicpa/advocacy/tax/downloadabledocuments/20181031-comment-letter-o...>

[maglib]

grantor vs. non-grantor trusts.  67(e) is only applicable to non-grantor trusts. Simple trusts must distribute all of the income earned to its beneficiaries and cannot accrue income.
 "estates and non-grantor trusts"  the whole issue is the IRS finalization though is only on 1041.... A non-grantor trust is a separate legal entity and is taxed as a separate taxpayer. It does get a deduction for distributions paid to beneficiaries but pays its own tax on undistributed income. ... Second, to be a non-grantor trust, the grantor (or his or her spouse) generally cannot have access to trust assets.

So the only method to claim these expenses above the line is filing a 1041 and issuing a k-1.
 Most grantor trusts file Form 1041, U.S. Income Tax Return for Estates and Trusts, containing the basic trust information (name, address, taxpayer identification number); the amount that must be reported by the deemed owner of the trust is presented in a grantor tax information letter. In some situations, the grantor trust may file a Form 1099 instead of a Form 1041, which may simplify tax reporting if the trust does not have many types of income.

Compared with a nongrantor trust, a grantor trust offers several tax advantages, such as:

Lower taxes due to the less compressed income tax brackets for individuals compared with those of trusts.
If the grantor trust is considered owned by a U.S. taxpayer, it is eligible to be an S corporation shareholder.
Any gain from the sale of a personal residence may qualify for the Sec. 121 exclusion.

So the big question is what is cost/benefit of grantor/non-grantor now that the tax laws changed?

[maglib]

An irrevocable trust can be treated as a grantor trust for tax purposes when the grantor meets the Internal Revenue Code requirements to become the owner of the assets. In this case, the irrevocable trust may be disregarded as a separate tax entity and the grantor will be taxed for all its income.    In this scenario.... I'm not sure if 67(e) even applies anymore.

[tagteam]

Yes, non-grantor trusts and estates.

[tagteam]

"So the big question is what is cost/benefit of grantor/non-grantor now that the tax laws changed?"

Legal - assets in a non-grantor trust are potentially shielded from judgment creditors (and others) whereas assets in a typical grantor trust are not (since the judgment debtor is treated as the owner of the assets).

That is a huge difference and, in addition to avoiding probate, one of the primary reasons for setting up the entity.

[maglib]

yes but deductability of fees may offset the cost/benefits is what I'm referring too.  A grantor trust switches status upon death and also avoids probate and hence why most homes in Florida are held by grantor Trusts.

[maglib]

@tagteam  Can A trust be an irrevocable grantor trust if the person is handicapped and NOT the trustee or since they gave up rights it should be a non-grantor trust? I understand they can disregard the 1041 and report directly as a grantor but, since they are not the trustee should they file as a irrevocable non-grantor as they really don't have control? And all income is reportable to the alive beneficiary? Their statement says irrevocable grantor trust and I'm thinking that's wrong and once she gave up control of the assets she should file 1041 and get 67(e) and it is non-grantor..  Thanks.

[tagteam]

You have a case to be made, in my opinion. Provided the beneficiary has completely and totally relinquished control of the assets, has no reversionary interest (or at least not more than ~5%), and has not retained power to revoke/replace, change beneficiaries, etc., then you have a good argument for the trust being of the non-grantor type.

[maglib]

@tagteam  "For tax purposes an irrevocable trust can be treated as a simple, complex, or grantor trust, depending on the powers listed in the trust instrument. "   
She lives off the trusts income but, a company  and my mother are the trustees and has disgression to release funds, the trust was court ordered and she has no power to revoke it.  I understand she has always paid taxes on the income in full, and there has never been a 1041 filed as it was not necesarry... she though gets a grantor tax information letter.  All trusts have grantors.  I am thinking this is a non-grantor trust as she has no control although for tax purposes there is no requirement to file the 1041 as she has all benefits but, under the new tax laws the only way to get the 67(e) deduction is to file a 1041.   Upon her passing, it becomes non-grantor no matter what and as there are multiple beneficiaries, then a 1041 is required by tax law to be done.    Do you think I'm correct and I should start filing the 1041?

[tagteam]

Well, you can read the grantor trust rules (IRC §§ 671–679 and Regs) yourself and make a determination, but a non-grantor trust is required to file a 1041 if one of the income thresholds is met.

Otherwise, I believe the only way to get that (67(e)) deduction is to report on a 1041 as a non-grantor trust. They seem to have left deductibility intact with the only limitation being that the expenses must be incurred because of that fact that the property is being held in a trust (or estate).

[maglib]

@tagteam the more I read the more I realize there always should have been a 1041 as the Trust has never distributed all the income and retains and reinvests it.  This Trust has existed since 1985 and even got audited for reporting in the 1040 and deducting the investment expenses in full not subject to 2%.... it occurred before special needs trusts existed but, this was the prelude to them as court ordered to support her after a car accident.  Income or principal discretion of the Trustees.... disposition only upon her death .  

[tagteam]

"Income or principal discretion of the Trustees.... disposition only upon her death."

There you have it - appears as if she has absolutely zero control and no power/authority to revoke, replace assets, change beneficiaries, nor vest assets in herself. It is sort of difficult to see how grantor trust rules would apply here.