New Proposed Regulations for Estates and Trusts

May 15, 2020

On Monday, the IRS issued proposed regulations under sections 67 and 642 (REG-113295-18) to clarify that certain deductions are allowed to an estate or non-grantor trust because they are not miscellaneous itemized deductions. These rules apply to estates and non-grantor trusts (including the S portion of an electing small business trust) and their beneficiaries.

The proposed regulations would allow estates and trusts the following deductions under section 67(e):

  • Costs paid or 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;
  • The distribution deduction for trusts distributing current income to beneficiaries; and
  • The distribution deduction for estates and trusts accumulating income.

According to the proposed regulations, these deductions are not affected by the suspension of the deductibility of miscellaneous itemized deductions for individual taxpayers for tax years beginning after December 31, 2017, and before January 1, 2026, as provided in the Tax Cuts and Jobs Act. The proposed regulations also explain how to determine the character, amount, and allocation of deductions in excess of gross income that a beneficiary succeeds to on the termination of an estate or non-grantor trust.

Notice 2018-61, issued in July 2018, created the question of how to treat section 642(h) excess deductions, which are passed on to beneficiaries when a trust terminates. Under the proposed regulations, each deduction comprising the section 642(h) excess deduction retains its separate character as an amount allowed in arriving at adjusted gross income, as a non-miscellaneous itemized deduction, or as a miscellaneous itemized deduction. The preamble to the proposed regulations confirms that excess deductions are allocated to beneficiaries using the rules of Treas. Reg. § 1.642(h)-4.

The regulations are proposed to apply to tax years beginning after they are published as final in the Federal Register. In addition, the IRS is permitting estates and non-grantor trusts and their beneficiaries to rely on the section 67 proposed regulations for tax years beginning after December 31, 2017, and on or before the date the regulations are published as final regulations. Taxpayers may also rely on the section 642(h) proposed regulations for beneficiaries’ tax years beginning after December 31, 2017, and on or before the date these regulations are published as final regulations in the Federal Register in which an estate or trust terminates.

Related Resources