Taxability of trust income under TCJA

[Crabby Mike]

So just a heads-up for those of you involved with trusts in any way -- grantor, beneficiary, trustee, etc.


My adult "kids" are beneficiaries of a trust set up by their late Grandma (my ex-MIL), of which I am co-trustee. We just received their 2018 K-1s, which included an unpleasant surprise. Because the "Tax Cut and Jobs Act" eliminated deductibility of certain "miscellaneous expenses," their reported income jumped sharply from previous years, though actual income did not. While trustee and accounting fees are still deductible, "investment expenses" (brokerage fees and such) are not. In their case, the trust company we use charges 1% to manage the accounts, none of which was determined to be deductible by our accountant, which will result in their paying taxes on more than they received. Note that guidance from the IRS is still somewhat fuzzy on this, and different accountants may reach different conclusions.


I don't know what, if anything, we could do differently to avoid or lessen this impact, but it certainly could alter the math regarding whether to leave assets outright or in trust.

[SecondCor521]

Stop using the trust company? Is that an option?

My Mom's bypass trust is just at Vanguard, no trust company and no 1% involved.

[Dtail]

Quote:

Originally Posted by SecondCor521 Stop using the trust company? Is that an option? My Mom's bypass trust is just at Vanguard, no trust company and no 1% involved.

Both my parents trust and brother's trust are at Fidelity managed by me. No fees.

[ERD50]

" which will result in their paying taxes on more than they received" ?

The distributed income was less than 1%? Furthermore, taxes on the distribution would be a % of the distribution, not the entire amount. Not making sense.

-ERD50

[Crabby Mike]

Quote:

Originally Posted by ERD50 " which will result in their paying taxes on more than they received" ? The distributed income was less than 1%? Furthermore, taxes on the distribution would be a % of the distribution, not the entire amount. Not making sense. -ERD50

I think you read it wrong. The amount reported as income on the K-1 includes both what they actually received, net of fees, and the trust company's 1% fee, which is no longer deductible. So they will be taxed on an income amount larger than they actually received. Their taxes, of course, will be a % of that amount, which is mostly qualified dividends.


I agree with the earlier posters -- I'll be pushing to move the trust to somewhere with much lower fees, such as Fidelity or Vanguard. I hadn't done so to date because for now they remain at the same company she was using when she passed, and I wasn't making waves.

[pb4uski]

Quote:

Originally Posted by Dtail Both my parents trust and brother's trust are at Fidelity managed by me. No fees.

Similar here, no fees and I manage it.... but at Vanguard rather than Fidelity.

[cathy63]

I'm just curious, in prior years, did the beneficiaries deduct these fees on their own Schedule A's as Investment Expenses subject to the 2% of income floor, or did the trust deduct them on its own tax return?

[Crabby Mike]

Quote:

Originally Posted by cathy63 I'm just curious, in prior years, did the beneficiaries deduct these fees on their own Schedule A's as Investment Expenses subject to the 2% of income floor, or did the trust deduct them on its own tax return?

The CPA who prepares the K-1s deducted them from the reported income, so what was reported there was exactly what the beneficiaries received.

[Crabby Mike]

Quote:

Originally Posted by pb4uski Similar here, no fees and I manage it.... but at Vanguard rather than Fidelity.

For those who use Fidelity or Vanguard for a trust, can you explain the mechanics? (How income is paid out, access restricted to trustees, etc.) I know that both offer "trust services" at relatively low cost. I'd like to present a proposal to my co-trustee (lawyer) to find a lower-cost solution.

[pb4uski]

In our case, it is a taxable account in the name of the trust with the trust's TIN. I have it set up so any dividends or capital gain distributions go directly to my mom's bank account (she is currently the sole beneficiary).

[Texas Proud]

Quote:

Originally Posted by Crabby Mike The CPA who prepares the K-1s deducted them from the reported income, so what was reported there was exactly what the beneficiaries received.

Just curious... and this is from over 3 decades ago....


But from what I remember you cannot have more income on a K-1 from a trust than what was distributed... the remainder was kept in the trust and was taxed there...


Why would this be different?

[Crabby Mike]

As the accountant explained it to me, since these expenses are no longer deductible, either the trust or the beneficiaries could bear the additional tax burden, but the trust pays a higher tax rate, so in the end it would cost them more.

[Texas Proud]

Quote:

Originally Posted by Crabby Mike As the accountant explained it to me, since these expenses are no longer deductible, either the trust or the beneficiaries could bear the additional tax burden, but the trust pays a higher tax rate, so in the end it would cost them more.

So what you are saying is the trust has the option of distributing the non-deductible expenses are extra income? This would lead me to believe that there is another number on the K-1 showing non-deductible expenses...

[Crabby Mike]

I don't think that's the case. Trust takes in income from dividends and interest, pays out trustee, accounting, and "financial adviser" fees, then distributes remainder to beneficiaries. Because the advisor fees are no longer deductible, the beneficiaries' K-1s show more income than they actually received. I suppose in theory the trust could retain enough income to pay the fees, but they would still not be deductible, so would be taxed at a higher rate there.

[SecondCor521]

Quote:

Originally Posted by Crabby Mike For those who use Fidelity or Vanguard for a trust, can you explain the mechanics? (How income is paid out, access restricted to trustees, etc.) I know that both offer "trust services" at relatively low cost. I'd like to present a proposal to my co-trustee (lawyer) to find a lower-cost solution.

Similar to pb4uski's answer...the trust in our case is a marital bypass / credit shelter trust set up when my Mom passed away in 2016.

The assets were already at Vanguard in a joint taxable account. We just set up the trust account with some paperwork including the trust EIN, then told Vanguard to move the assets from the joint account to the trust account.

It shows up on my Dad's Vanguard login because he is the trustee. It shows up on my Vanguard login because I have POA for my Dad. Of course, it shows up as a separate account, and we get separate tax paperwork every year for it.

If we want to distribute income, my Dad can either call in or I think he can just do an online transfer at the Vanguard website. Easy.

Trust admin costs by Vanguard are zero dollars per year. When we distributed income last year, we just gave the info to my Dad's CPA and he prepared the K-1's, the cost of which were included in the tax preparation services for the trust income tax return that year.

[Dtail]

With my parents trust at Fidelity, since they don't need that investment income, the income stays in the trust and is not distributed at least as of now.

[pb4uski]

Quote:

Originally Posted by Dtail With my parents trust at Fidelity, since they don't need that investment income, the income stays in the trust and is not distributed at least as of now.

But doesn't any undistributed income get taxed in the trust tax return at trust tax rates?

That is part of why I have dividends and capital gain distributions paid to my Mom.... so it is taxed at her tax rate rather than trust income tax rates. In our case the trust is just a pass-through... at the end of the day the income on those assets end up being taxed as if Mom owned them... they are just reported to her on a K-1 from the trust rather than a 1099 from Vanguard. .

[Dtail]

Quote:

Originally Posted by pb4uski But doesn't any undistributed income get taxed in the trust tax return at trust tax rates? That is part of why I have dividends and capital gain distributions paid to my Mom.... so it is taxed at her tax rate rather than trust income tax rates. In our case the trust is just a pass-through... at the end of the day the income on those assets end up being taxed as if Mom owned them... they are just reported to her on a K-1 from the trust rather than a 1099 from Vanguard. .

Yeah that is an known issue, but the trust is not a pass through trust. It is an irrevocable trust (don't get mad) set up for LTC costs protection involving medicaid.
My alternatives are using muni bonds.

Hey we can discuss more at get together next week.