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trustee power

Forum|Forum|1 year ago
April 2, 2025
4 replies
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Does this provision in the trust document for an Irrevocable trust allow the trustee to allocate all expenses to taxable income? Expenses in question are tax preparation and advisory fees. The tax-exempt income in this trust is 51% of total income.

If so, then the income that is distributed to the beneficiary will be much lower and the beneficiary's personal income tax will be lower.

" The trustee shall have the power, in the trustee's sole discretion, to do any or all of the following acts: 1. (iii) to elect any item either as an income or estate tax deduction for any tax reporting purpose; 2. to determine when a particular item will be deducted or reported as income."

Lacerte Tax

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Best answer by Karen_pdx

My understanding has always been that a trust document's provisions can't override the IRC. Reg 1.265-1 requires a reasonable allocation of expenses to tax-exempt income. There are various methods that could be considered reasonable, but a zero allocation wouldn't appear to be reasonable on its face.

The powers you cited - 1. appears gives the power to choose on a decedent's estate/trust whether to deduct a given deduction on the 1041 or the 706. 2. appears to give the power to decide the timing of a deduction or income, but my understanding has been, that type of provision usually applies to the trustee's determination of amount of fiduciary accounting income that is distributable to a beneficiary, not to taxable income.

S

strongsilenceAuthor

Level 10

I found nothing in the UPIA for CA to disallow this discretion. 16335 supports it:

16335 a) In allocating receipts and disbursements to or between principal and income, and with respect to any other matter within the scope of this chapter, a fiduciary:

(1) Shall administer a trust or decedent's estate in accordance with the trust or the will, even if there is a different provision in this chapter.

S

strongsilenceAuthor

Level 10

Beneficiary, who is also the trustee, received 46K in "distributions of earnings" as characterized by the investment custodian. The K1 shows 9K of dividend income and 36K of tax-exempt income. This is quite a deal.

K

Karen_pdxAnswer

Level 5

My understanding has always been that a trust document's provisions can't override the IRC. Reg 1.265-1 requires a reasonable allocation of expenses to tax-exempt income. There are various methods that could be considered reasonable, but a zero allocation wouldn't appear to be reasonable on its face.

The powers you cited - 1. appears gives the power to choose on a decedent's estate/trust whether to deduct a given deduction on the 1041 or the 706. 2. appears to give the power to decide the timing of a deduction or income, but my understanding has been, that type of provision usually applies to the trustee's determination of amount of fiduciary accounting income that is distributable to a beneficiary, not to taxable income.

BobKamman

Level 15

As @Karen_pdx states, "My understanding has always been that a trust document's provisions can't override the IRC."

There are two kinds of allocations. One allocation is between trust and beneficiary, and usually involves capital gains. Trustee can allocate them to the beneficiary, which often saves tax, or to the trust, which is usually the default. IRS doesn't care who reports the income, as long as it gets reported.

And then there is allocation of deductions between taxable income and tax-exempt income. That's required by the law of the land, not by the "law" of the trust document.

Maybe you could allocate all of the taxable income to the beneficiary, and therefore all of the deductions. But you can't allocate some of the tax-exempt income, and none of the deductions related to it, to the beneficiary.

sjrcpa

Level 15

But, might the tax preparation fee be allocable to taxable income? It is only incurred because a tax return is needed,

The more I know the more I don’t know.

Accountant-Man

Level 13

Advisory fees are not deducible any more, same for 1041s as for 1040s(former miscellaneous deductions still allowed I some states).

I have seen many bank as trustee 1099s which allocate legal and accounting fees between taxable and tax-exempt income. I do that also.

The tax deduction does reduce taxable income to either the trust or the beneficiary.

** I'm still a champion... of the world! Even without The Lounge.

BobKamman

Level 15

There are circumstances where some or all of the advisory fees are deductible. Treasury issued some obtuse regulations on this in 2020. Also, what are called "advisory fees" sometimes include commissions on trading, and you can use a reasonable method to "unbundle" them.

I allocate legal and accounting fees between taxable and exempt income, but if it made a big difference in tax I might take a second look at it.

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