deductions allowed under TCJA estates and trusts

deductions allowed under TCJA estates and trusts

This article is from Illinois tax school dated July 2020 by Tom O’Saben, EA
Title: Allowable Deductions for Trusts
https://taxschool.illinois.edu/post/all ... or-trusts/

Although the article does not clearly state it’s purpose is to address deducting the expenses from the estate's gross income for figuring the estate's income tax rather than figuring the estate tax, it is assumed it’s referring to estate’s income tax ie 1041.

Bolded bullets of interest
Excerpt:
The proposed regulations put into motion the “promise” of Notice 2018-61’s treatment and makes the following clarifications as to trust and estate expenses which are not miscellaneous expenses under IRC §67(e) and are therefore deductible:

- The administrative expenses of an estate or trust that would not have been incurred if the trust or estate didn’t exist. Examples include the following.
-Tax preparation fees for estate and trust tax returns (1041)
Attorney fees
-Trustee fees
-Management and maintenance of property expenses (discussed below)
-Investment advisory fees specific to the estate or trust
-Fees paid and expenses reimbursed (such as travel) for a personal representative or fiduciary who is administering the trust or estate
-The personal exemption of an estate or trust
-The distribution deduction for trusts which distribute income, and
-The distribution deduction for estates or trusts which accumulate income[/i]

for management and maintenance..
Excerpt:
The first item to become familiar with is that the “home” is not a personal residence to the trust or estate (we’re not addressing personal residence trusts here). The second item then is given the previous statement, what, if any, expenses can be deducted for the care and upkeep of this property by the trust or estate?

Under §20.2053-3(d)(1), deductions for expenses of administering an estate:

Expenses necessarily incurred in preserving and distributing the estate, including the cost of storing or maintaining the estate property if it is impossible to effect immediate distribution to the beneficiaries, are deductible to the extent permitted by § 20.2053-1 Deductions for expenses, indebtedness, and taxes; in general.

However, the same is not true regarding improvements to the property, which would not be depreciable and should be added to the property’s corpus (principal) basis:

Expenses for preserving and caring for the property may not include outlays for additions or improvements, nor will such expenses be allowed for a longer period than the executor is reasonably required to retain the property.

As tax professionals, we ask the question, “Where do we deduct the repairs and maintenance on Mom’s house while it’s in the trust or estate?”

We go back to the guidance of the proposed regulations illustrated earlier. Are these not expenses that would not have been incurred if the trust or estate didn’t exist? One could argue that repairs and maintenance would be required no matter who (or what) controls it. Still, I believe it is reasonable to conclude that the expenses to maintain the property are “reasonable and necessary administrative expenses of a trust or estate” and are therefore deductible.


Question - Is there a miss understanding what the IRS has clarified that maintenance/expenses to maintain vacant homestead property held in the estate or trust until it can be legally disposed can not be deducted on estate/trust income tax return 1041? ie like lawn care, pool service, surveillance to protect and etc?

Question - is the author combining rules for deductions allowed for estate or trust for calculation of income versus calculation of estate tax?

Thanks in advance

I'm not sure. I was always amazed that the expenses of upkeep for a vacant property before it was sold was never directly addressed since it is extremely common in the estates I work with (i.e. small ones). I've seen arguments both ways, and the times it was discussed here I don't remember a conclusive answer either due to the same split you mention. The one time I deducted those expenses the IRS never investigated or sent a letter.

I don't think I've ever seen somebody claim you could deduct investment fees now that you can't do it on a 1040.

This sure does not seem like something that should be left to shrugging the shoulders.

“Under section 67(e), deductions are allowable for costs which are paid or incurred by an estate or non-grantor trust in connection with the administration of the estate or trust and would not have been incurred if the property were not held in such trust or estate.”

It could argued that administrator has 67(e) costs for lawn care, pool service, surveillance to protect and etc
For real property which is held in an estate that an individual owner would not incur. For example, waiting on the probate court order determining homestead status so the property could be sold. An individual would not have the extra expense as they would not be inhibited to sell for these reasons. Does this have merit or is this a meaningless whine? If merit would it really be 67(e) type?

As for Tom O’Saben, EA, it seems he does not address what is included in Instructions for Form 1041 line 15a.

It would be beneficial if there was not such a disparity on this subject.