Some states are contemplating new taxes that could cause trusts in those states to be taxed. Depending on where they’re based, there could potentially be a greater burden on the trustees and the beneficiaries regarding the reporting and taxation of trust income. Understanding what’s happening in the state where your trust situs is based is important.
Additionally, there may be an option to make distributions from a trust and better utilize the Section 199A deduction, which provides a 20% deduction on qualified business income. This can be complicated, but trustees might want to ask whether the beneficiaries need additional income to fully utilize the deduction or if too much would result in a phaseout of the deduction. The trustee must pay attention to whether or not there would be uneven distributions which are proper and the eventual effect on future distributions.
There are other taxes that could be affected by distributions. The net investment income tax of 3.8% is on a portion of the adjusted gross income over certain thresholds—generally $200,000 if single and $250,000 if married filing jointly. If distributions occur when there are multiple beneficiaries, there may be tax at the trust level but not at the beneficiary level.
With the $10,000 limit on state and local tax deductions, trustees may need to monitor distributions, particularly when distributable net income will face a greater tax burden due to the lack of the deduction. Consider if the tax benefits outweigh other issues, such as asset protection and unequal distributions.