Planning for Deductions in Trusts and Estates: Excess Losses on Termination, Distributions, Charitable Contributions

Distributions, charitable contributions, and excess losses on termination dramatically impact the taxation of a trust and its beneficiaries. Proper planning can minimize taxation and maximize deductions for trusts and estates. Trusts and estates can take tax deductions for charitable contributions. Unlike individual deductions, these are not subject to adjusted gross income limitations, and these contributions can be made to foreign charities. However, there must be a provision for the contribution in the trust document or will.

IRC Section 661 governs distributions made by complex trusts. Complex trusts, unlike simple trusts, are not required to distribute all income but can accumulate accounting income. These trusts can deduct the income required to be distributed but not more than the trust's distributable net income for the year. The elimination of miscellaneous deductions by the Tax Act of 2017 paved the way for Section 67(e). This section states that trusts are not affected by the suspension of miscellaneous deductions and further that administrative costs incurred, which would not have been if assets weren't held in the trust or estate, are indeed deductible.

Planning for excess deductions on termination can provide significant tax deductions for beneficiaries. The trustee has discretion to allocate these deductions to various types of income and, ultimately, the trust or the beneficiary. Analyzing these deductions to ascertain the type of income each can offset and whether they are deductible by the trust or beneficiary can provide significant tax savings.

Listen as our panel of trust and estate experts explains how planning for deductions can substantially reduce taxes paid by trusts and estates and their beneficiaries and heirs.