Some states are contemplating new taxes which would 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. Thus, 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 utilize the Section 199A deduction which provides a 20% deduction. 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 phase-out. The trustee must pay attention to whether there would be uneven distributions which are proper and what the eventual effect on future distributions would be.
Because of the $10,000 limit on state tax deductions, there has been discussion on certain types of trusts, such as personal-use residential property or other types of property in trusts. Due to this limitation on the deduction of state taxes, trustees may need to watch 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.