IRS Issues Proposed Regulations on Miscellaneous Deductions for Estates and Trusts

Attorneys who handle trusts and estates, but don't file tax returns for trusts and estates, should consider how the estate or trust income tax return (Form 1041) will affect the beneficiaries.  While tax consequences aren't the only consideration in administering a trust or estate, they certainly are on the list. A geat tool for trustees, personal representatives, and their attorneys is IRS Publication 559, which provides an overview for the taxation of trusts and estates.  While the current estate tax exemption of $11.58 million means few estates will owe estate tax, many estates and trusts still have income that must be reported on Form 1041.

Administration expenses are deductible against the estate or trust's income. The timing of the payment of those expenses is one item that affects the bottom line for the trust or an estate. It also has an impact on beneficiaries who itemize deductions on their personal return.  Under current law, an individual has a standard deduction of $12,000, while married couples have a deduction of $24,000.  This simplifies the tax return for many taxpayers, because they don't have enough itemized deductions to exceed the generous standard deduction. For those who do itemize, the use of the estate's unused deductions in its final year could help those taxpayers who itemize. It all depends upon the number of beneficiaries and the total itemized deductions that each beneficiary could claim if they received a share of the estate or trust's unused itemized deductions.

On December 22, 2017, Congress passed “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018,” P.L. 115-97 (Act).  The new law added Section 67(g) to the Internal Revenue Code.  This new subsection eliminated miscellaneous itemized deductions.  There was confusion about whether this eliminated the ability of trusts and estates to pass unused deductions on to the beneficiaries for use on their personal returns.
In IRS Notice 2018-61, the Internal Revenue Service addressed this confusion.  Link to IRS Notice 2018-61.   The IRS Notice explained:

The Treasury Department and the IRS intend to issue regulations clarifying that estates and non-grantor trusts may continue to deduct expenses described in section 67(e)(1) and amounts allowable as deductions under section 642(b), 651 or 661, including the appropriate portion of a bundled fee, in determining the estate or nongrantor trust’s adjusted gross income during taxable years, for which the application of section 67(a) is suspended pursuant to section 67(g). Additionally, the regulations will clarify that deductions enumerated in section 67(b) and (e) continue to remain outside the definition of “miscellaneous itemized deductions” and thus are unaffected by section 67(g).

Section 67(e)(1) of the Internal Revenue Code says:

(e)Determination of adjusted gross income in case of estates and trusts. For purposes of this section, the adjusted gross income of an estate or trust shall be computed in the same manner as in the case of an individual, except that—

(1)

the deductions for costs which are paid or incurred in connection with the administration of the estate or trust and which would not have been incurred if the property were not held in such trust or estate, and

(2)

the deductions allowable under sections 642(b), 651, and 661, 

shall be treated as allowable in arriving at adjusted gross income. Under regulations, appropriate adjustments shall be made in the application of part I of subchapter J of this chapter to take into account the provisions of this section.

In IRS Newswire 2020-90, The Internal Revenue Service announced that it has now issued proposed regulations.  The release offered the following summary, including a link to the proposed regulations.

WASHINGTON — The Internal Revenue Service today issued proposed regulations that provide guidance for estates and trusts clarifying that certain deductions of estates and non-grantor trusts are not miscellaneous itemized deductions. 

The Tax Cuts and Jobs Act (TCJA) prohibits individual taxpayers from claiming miscellaneous itemized deductions for any taxable year beginning after Dec. 31, 2017, and before Jan. 1, 2026.
Specifically, the proposed regulations clarify the following deductions are allowable in figuring adjusted gross income and are not miscellaneous itemized deductions:

• Costs paid or incurred in connection with the administration of the estate or trust which would not have been incurred otherwise.
• Deductions concerning the personal exemption of an estate or non-grantor trust.
• Deductions for trusts distributing current income.
• Deductions for trusts accumulating income

Finally, the guidance clarifies how to determine the character, amount and manner for allocating excess deductions that beneficiaries succeeding to the property of a terminated estate or non-grantor trust may claim on their individual income tax returns.
For more information about this and other TCJA provisions, visit IRS.gov/taxreform.

After the initial confusion in 2018, the proposed regulations are a welcome indication of the Internal Revenue Service's position on these issues.

IRS Issues Proposed Regulations for

Miscellaneous Deductions for Trusts and Estates

Attorneys who handle trusts and estates, but don't file tax returns for trusts and estates, should consider how the estate or trust income tax return (Form 1041) will affect the beneficiaries.  While tax consequences aren't the only consideration in administering a trust or estate, they certainly are on the list. A geat tool for trustees, personal representatives, and their attorneys is IRS Publication 590, which provides an overview for the taxation of trusts and estates.  While the current estate tax exemption of $11.58 million means few estates will owe estate tax, many estates and trusts still have income that must be reported on Form 1041.

Administration expenses are deductible against the estate or trust's income. The timing of the payment of those expenses is one item that affects the bottom line for the trust or an estate. It also has an impact on beneficiaries who itemize deductions on their personal return.  Under current law, an individual has a standard deduction of $12,000, while married couples have a deduction of $24,000.  This simplifies the tax return for many taxpayers, because they don't have enough itemized deductions to exceed the generous standard deduction. For those who do itemize, the use of the estate's unused deductions in its final year could help those taxpayers who itemize. It all depends upon the number of beneficiaries and the total itemized deductions that each beneficiary could claim if they received a share of the estate or trust's unused itemized deductions.

On December 22, 2017, Congress passed “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018,” P.L. 115-97 (Act).  The new law added Section 67(g) to the Internal Revenue Code.  This new subsection eliminated miscellaneous itemized deductions.  There was confusion about whether this eliminated the ability of trusts and estates to pass unused deductions on to the beneficiaries for use on their personal returns.

In IRS Notice 2018-61, the Internal Revenue Service addressed this confusion.  Link to IRS Notice 2018-61.   The IRS Notice explained:

The Treasury Department and the IRS intend to issue regulations clarifying that estates and non-grantor trusts may continue to deduct expenses described in section 67(e)(1) and amounts allowable as deductions under section 642(b), 651 or 661, including the appropriate portion of a bundled fee, in determining the estate or nongrantor trust’s adjusted gross income during taxable years, for which the application of section 67(a) is suspended pursuant to section 67(g). Additionally, the regulations will clarify that deductions enumerated in section 67(b) and (e) continue to remain outside the definition of “miscellaneous itemized deductions” and thus are unaffected by section 67(g).

Section 67(e)(1) of the Internal Revenue Code says:

(e)Determination of adjusted gross income in case of estates and trusts. For purposes of this section, the adjusted gross income of an estate or trust shall be computed in the same manner as in the case of an individual, except that—

(1)

the deductions for costs which are paid or incurred in connection with the administration of the estate or trust and which would not have been incurred if the property were not held in such trust or estate, and

(2)

the deductions allowable under sections 642(b), 651, and 661, 

shall be treated as allowable in arriving at adjusted gross income. Under regulations, appropriate adjustments shall be made in the application of part I of subchapter J of this chapter to take into account the provisions of this section.

In IRS Newswire 2020-90, The Internal Revenue Service announced that it has now issued proposed regulations.  The release offered the following summary, including a link to the proposed regulations.

WASHINGTON — The Internal Revenue Service today issued proposed regulations that provide guidance for estates and trusts clarifying that certain deductions of estates and non-grantor trusts are not miscellaneous itemized deductions. 

The Tax Cuts and Jobs Act (TCJA) prohibits individual taxpayers from claiming miscellaneous itemized deductions for any taxable year beginning after Dec. 31, 2017, and before Jan. 1, 2026.

Specifically, the proposed regulations clarify the following deductions are allowable in figuring adjusted gross income and are not miscellaneous itemized deductions:

·         Costs paid or incurred in connection with the administration of the estate or      trust which would not have been incurred otherwise.

·         Deductions concerning the personal exemption of an estate or non-grantor trust.

·         Deductions for trusts distributing current income.

·         Deductions for trusts accumulating income

Finally, the guidance clarifies how to determine the character, amount and manner for allocating excess deductions that beneficiaries succeeding to the property of a terminated estate or non-grantor trust may claim on their individual income tax returns.

For more information about this and other TCJA provisions, visit IRS.gov/taxreform.

After the initial confusion in 2018, which was reduced by Notice 2018-61, the proposed regulations should give practitioners more comfort about the IRS position on this issue.

 The information contained in this post is summary in nature, does not cover all aspects of the law as it pertains to the taxation of trusts and estates, and is provided for educational purposes only to you as a visitor to the Florida Wills, Trusts and Estates Blog. This post should not be considered to be legal or tax advice, nor is it intended as specific or detailed advice, as we do not have any information specific to your circumstances. Further, the preceding post is not intended to be an all-inclusive discussion of the topic covered in the post, but is intended as a guide. There there may be other matters not described in the post that may impact your situation. Therefore, always seek legal advice regarding your circumstances. Finally, this post is intended as a public service and is not a solicitation seeking legal employment.

Stimulus Checks for Deceased Taxpayers?

Here's a link to an interesting article about the recent stimulus payments.  LA Times Article

We heard from one family this week, asking about the stimulus payment that was paid to their deceased loved one.  The stimulus payments are for the 2020 tax year, but the U.S. Treasury used data from the 2019 returns, if filed, and, if not, the 2018 returns. They did what Congress wanted - get the money to Americans as quickly as possible.  What's not clear is how funds paid to deceased taxpayers will be returned.  We'll watch for word on what to do. For now, it would seem prudent not to spend money that is for a taxpayer who died before January 1, 2020.

Here's a link to the actual text of the legislation:
https://irc.bloombergtax.com/public/uscode/doc/irc/section_6428

Like so many other things in our lives right now, this reminds me of a saying I learned during Basic Training at Fort Knox, Kentucky, "Hurry Up and Wait."

Update to IRS Filing and Payment Extensions Due to National Health Emergency

On April 10th, The Internal Revenue Service issued Notice 2020-23, which added to the list of filing and payment deadlines extended as a result of the national health care emergency in Notice 2020-18 and 2020-20. The notice includes Forms 1041, 706, 709 and other forms relating to trusts and estates.

Click on the link for the full text of the notice. Notice 2020-23

Please consult with your tax advisor to ensure that you meet all filing and payment deadlines to avoid penalties and interest.

Florida Probate Rules Updated to Recognize Electronic Wills and Notarization

 

On January 16, 2020, The Florida Supreme Court approved amendments to The Florida Probate Rules.  These were “fast-track” amendments based upon changes to The Florida Statutes during the 2019 legislative session.  For probate and guardianship attorneys, the big change is the recognition of electronic notarization which became effective January 1, 2020 and the recognition of electronic wills, effective July 1, 2020.  Although these statutes reflect rapidly-changing technology, they do require strict procedures to ensure the validity of the notarized document or will, and to ensure the integrity of documents preserved in electronic format.  The new procedures will introduce third-party vendors into the process due to the requirements for preserving electronic copies of wills and certain other estate planning documents, as well as the requirements imposed upon electronic notaries.  While this initially appears to add convenience, time will tell how well these procedures work and how the added technology requirements will affect the overall cost of estate planning for those who utilize the new procedures.

Here’s a link to the rule changes:

https://efactssc-public.flcourts.org/casedocuments/2019/2071/2019-2071_disposition_148503_d29.pdf

The changes are primarily updates to the committee notes following each rule.  These changes are invaluable because the cross-reference each rule with other rules and statutes that need to be considered when applying a particular rule.  The provide a great research tool.

The amendments also recognized that documents, such as wills, could be submitted in electronic format, as long as the original format complied with the laws for electronic notarization and electronic wills.  The electronic document and the video of the signing must be preserved in a tamper-proof format. For wills signed by ink on paper, the original must still be preserved and filed with the clerk upon the death of the person making the will. 

Florida Probate Rules Committee Vulnerable Adult Rule

The Florida Probate Rules Committee was tasked with the creation of forms for Florida's law that protects vulnerable adults from exploitation.  Section 825.1035 now permits an injunction to protect our state’s most vulnerable residents from various types of exploitation.  The statute offers a civil remedy to stop financial or physical abuse by freezing financial accounts and allowing for an injunction to keep the exploiter away from the vulnerable adult.  Although the statute initially provided a form, the Florida Supreme Court asked the rules committees to develop a standard form for use throughout the state. 

The Probate Rules Committee took on the challenge, drafted a rule and considered comments to improve the proposed form.  It appeared that various circuits throughout the state were suggesting or requiring forms that were not the same as the form in the statue.  The Probate Rules Committee received one comment suggesting that some petitions that complied with the form in the statute were being dismissed for not complying with the statute.

The usual rule process was followed - a petition was filed, comments were requested, and then the final version of the new rule was published for final comments. Comments were due by April 15^th.  No comments have been received by the Probate Rules Committee, so it is anticipated that the Supreme Court will enter an order making the proposal final. On occasion, the Florida Supreme will modify a submission from one of the rules committee, so it’s not over until the Florida Supreme Court says so.

Here’s a link to the new Rule 5.920;

https://efactssc-public.flcourts.org/casedocuments/2020/21/2020-21_petition_74875_appendix2drules.pdf

Hopefully the new rule will offer consistency and protection for our vulnerable adults who become victims to those who would prey on the elderly and disabled.

Amendment to Rule 2.205, Rules of Judicial Administration

The Florida Supreme Court, on its own motion, updated the Rules of Judicial Administration to better react to unexpected circumstances such as those facing the courts right now.  The courts, from the Florida Supreme Court, down to the local circuit courts have done an amazing job.  As Floridians, we're used to preparing for hurricanes, but none of us have experienced the changes that have occurred over the past few months.  Our judges are certainly doing their part to get us through this. They, along with their staff and all who support them in their work, are quietly getting the job done. 

The amendment inserts a new subdivision  (a)(2)(B)(v) into Rule 2.205 and renumbers the subsequent subdivisions: 

(v) the power, upon request of the chief judge of any circuit or district, or sua sponte, in the event of a public health emergency that requires mitigation of the effects of the emergency on the courts and court participants, to enter such order or orders as may be appropriate: to suspend, extend, toll, or otherwise change time deadlines or standards, including, without limitation, those affecting speedy trial procedures in criminal and juvenile proceedings; suspend the application of or modify other requirements or limitations imposed by rules of procedure, court orders, and opinions, including, without limitation, those governing the use of communication equipment and proceedings conducted by remote electronic means; and authorize temporary implementation of procedures and other measures, including, without limitation, the suspension or continuation of civil and criminal jury trials and grand jury proceedings, which procedures or measures may be inconsistent with applicable requirements, to address the emergency situation or public necessity.

The full text of the opinion can be found here: 

https://efactssc-public.flcourts.org/casedocuments/2020/346/2020-346_disposition_149072_d29.pdf

The New Normal?

It is encouraging to see Americans pull together during difficult times.  That's part of the American character. Despite our shortcomings, we are a nation of good people. Our hearts go out to those affected by the pandemic and those who are sacrificing more than ever to serve others. 

As my colleagues and I try to work through many new challenges, we're adapting with new ways to serve our clients.  Instead of in-person meetings, telephone conferences and email communication help bridge the new gap between client and professional.  For live signings, constant sanitizing and wearing masks reduce the risks of in-person meetings where witnessing and notarizing are required. 

Electronic notarization became a legal reality in Florida in January, but the additional procedures involved with remote online notarization come with a cost - it is not free. Online will and trust executions will be possible under Florida law on July 1st, but it will also come with a price and additional complications. The Florida Bar's Real Property, Probate and Trust Law Section was vigilant as the Florida legislation was considered, not because they wanted to stop progress, but because they wanted to ensure protections for Floridians who elect those methods of signing crucial planning documents.  

So... is this the "new normal?"  While we're adapting for now, there is nothing to replace the interaction of an attorney and client during an in-person meeting. Estate planning, or the administration of an estate after the death of a loved one, is an emotional process.  The professional needs to understand how the client is feeling about personal and sensitive issues, much of which focuses around unpleasant events in life: the loss of a loved one, the declining capacity of a loved one (or our self), prolonged illness, and our own death. Despite all of the advancements in technology, human interaction remains critical. This is especially true for older Americans who did not grow up with modern technology.  

Americans are great at adapting to new challenges, and each generation brings a new perspective.  While progress is inevitable, are online communications, and even artificial technology, better than a human planner?  I've found over the past few weeks that a client communication can be based upon a misunderstanding or lack of information. In reading an email, it is difficult to know where the client is coming from.  Why are they worried about a particular issue?  Why did they request something that doesn't fit within the normal range of planning options? What happened in their life that made them worry? I apply my experience and training to the problem presented during an office conference.  It's tougher to do with an email.  Quality communication is essential.  It often takes more time to review and reply to an email than to speak with the client in person or on the phone. 

In some ways, the current pandemic will change our lives for ever.  The 9-11 tragedy and the recent mass shootings brought new security procedures to schools, airports and courthouses. We're getting used to those and understand the reasons behind the changes. They still bring additional expenses and inconvenience.  My take-away is that I'm fortunate to do what I do and I will value my interactions with clients more than ever, especially when they are face to face meetings.