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The Tax Cuts & Jobs Act (TCJA) includes Internal Revenue Code Section 67(g) which on its face suspends all miscellaneous itemized deductions for any taxable year beginning after December 31, 2017, and before January 1, 2026. But not all deductions are “miscellaneous itemized deductions” and thus some deductions are unaffected by new Section 67(g). When Congress enacted the TCJA in December 2017, many practitioners urged Treasury to clarify that the Act’s suspension of miscellaneous itemized deductions did not impact the ability of trusts and estates to deduct administrative costs including those incurred for tax, legal and financial advisory services.
Last week, Treasury issued final regulations that addressed this questions, among others. The final regulations confirm one such deduction that is not of the miscellaneous itemized variety, and is thus outside the scope of the TCJA’s suspension, is the deduction allowed under Section 67(e) for costs which are paid or incurred in connection with the administration of an estate or trust and which would not have been incurred if the property were not held in such trust or estate. As the final regulations acknowledge, the Section 67(e) deduction is allowed in computing adjusted gross income and is thus outside the definition of a miscellaneous itemized deduction.
Treasury did not however take the opportunity to clarify in the final regulations the deductibility of administrative costs incurred in connection with grantor trusts. This may result in disparate treatment between grantor and non-grantor trusts, the latter receiving a competitive tax advantage due to the deductibility of potentially significant tax, consultancy, and other planning costs associated with administering trusts. Furthermore, because many high-wealth taxpayers have multiple trusts of different varieties, the dichotomy arguably implied in the final regulations highlights the opportunity to restructure to maximize the deductibility of administrative costs, and highlights the importance of documenting the allocation of expenses among trusts to increase the likelihood of sustaining any claimed deductions associated with non-grantor trusts.