Tax law changes for trusts and estates

North Carolina residents who are planning for the future may be interested to learn about the ways in which recent tax reforms affect trusts and estates. The Tax Cuts and Jobs Act, which passed in December 2017, has a number of implications for estate planning. In the first place, the law created a $10,000 limit for deductions on state and local income taxes. While there has been some confusion about whether this applies to individuals only, it does pertain to income for trusts and estates beginning in the 2018 tax year.

In addition, trusts and estates with business income from a sole proprietorship, partnership or S corporation qualify under the Internal Revenue Code’s Section 199A for a new 20 percent tax deduction. It may be possible to apportion the deduction between the trust itself and its beneficiaries.

Because the tax reform law changed the way that deductions are made, there is often confusion about whether expenses of a trust or estate are still tax deductible. Some miscellaneous itemized deductions are no longer deductible, particularly any subject to a limitation of 2 percent of adjusted gross income. These include investment management fees. However, accounting expenses have long been deductible for a trust even though they would otherwise be limited by the 2 percent threshold for an individual. Both trusts and estates have also historically been able to fully deduct fees for trustees and executors. Experts say that taxes for trusts and estates are handled differently than those for individuals, and thus they remain valid despite the changes in the law.

When considering how to pass on wealth to the next generation, taxation can be one concern to consider. An estate planning lawyer can help a client thinking about the future develop key documents like wills, trusts and powers of attorney.