Question

Excess 67(e) Deductions: From Estate, to Trust, then to Beneficiaries?

Forum|Forum|1 year ago
February 27, 2025
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I'm working on filing the final year income tax returns for the estate I manage, on a short year return for 2025. The arrangement made in court is that everything in the estate will be transferred to the trust that was set up by the decedent, then the trustee can distribute the assets to the beneficiaries and dissolve the trust, ideally within the same year.

My issue is, can excess 67(e) deductions for AGI on the final year of the estate income tax return flow to the trust first on a k-1, then to the beneficiaries of the trust on a subsequent k-1, and still retain its character as a deduction for AGI? I haven't been able to find any official guidance on this (so please direct me to any that I missed), but I feel since the spirit of the law is that the deductions should retain their character, that it should apply here as well.

Not A Product Question

PatriciaV

According to the IRS Instructions for Form 1041 - Schedule K-1 Box 11 Code A, excess deductions on termination are reported to the beneficiaries as an adjustment to income on Form 1040 Schedule 1. Since these instructions apply to both trusts and estates, it would logically follow that the deductions would retain their character through the estate to the trust and ultimately to beneficiaries.

Most of the available authoritative information focuses on how the Sec 67(e) deductions are treated (not miscellaneous deductions) and how they should be reported to the individuals who claim the deductions on Form 1040.

You may wish to consult with a local tax attorney with estate and trust experience for advice specific to your tax situation.

Additional information: