US issues final regulations on permitted estate and trust deductions

Thursday, 24 September 2020
The US Internal Revenue Service (IRS) has issued final guidance confirming that certain necessary deductions from the gross value of a deceased person's estate or non-grantor trust are not disallowed by the Tax Cuts and Jobs Act 2017 (TCJA).

Section 11045(a) of the TCJA introduced some measures intended to limit the costs that estate administrators were allowed to charge to the deceased's estate and deduct from its gross income for tax purposes. These provisions amended sections 67 and 642 of the Internal Revenue Code to disallow 'miscellaneous itemized deductions' for taxable years beginning after 2017 and before 2026, without being precise about what was and was not permitted as a tax deduction. This led to some uncertainty among estate practitioners.

Earlier this year, the IRS issued draft guidance indicating that certain routine charges would continue to be tax-deductible, both for estates and for non-grantor trusts. These have now been formally confirmed as allowable in the final regulations, which affect estates, non-grantor trusts including the S portion of an electing small business trust, and their beneficiaries.

Deductions are explicitly allowed for:

  • costs incurred in connection with the administration of an estate or non-grantor trust that would not have been incurred if the property were not held in the estate or trust;
  • the personal exemption of an estate or non-grantor trust; and
  • the distribution deduction for trusts distributing current income, and the distribution deduction for estates and trusts accumulating income.

They also clarify the excess deductions that beneficiaries can claim on their individual income tax returns when they succeed to property on the termination of an estate or non-grantor trust.


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