Estate & Trust Planning Under Section 68 and the Emerging 2.37 Limitation – An Alice and Wonderful Trip Though the UPIA, UTC and Equitable Adjustments

This article was originally posted to Steve Leimberg’s Estate Planning Email Newsletter – Archive Message #3311.

Martin M. Shenkman, Robert S. Keebler and Jonathan G. Blattmachr

The recent interpretation of Internal Revenue Code Section 68 in the fiduciary income tax, trust accounting and Uniform Trust Code setting introduces a level of uncertainty and distortion that reaches far beyond the routine loss of a deduction.^[i] At stake is not simply whether certain expenses or distribution deductions are slightly reduced. The issue instead is whether long-settled assumptions of Subchapter J continue to function as practitioners have historically expected, particularly where the statute is read to apply to deductions that allocate or shift income and corpus rather than merely reduce it. In estates and trusts, that distinction is critical because the fiduciary income tax system was designed around the proposition that income distributed out of an entity can generally be taxed at the beneficiary level while the entity receives a corresponding DNI deduction.^[ii] Once that symmetry is impaired, the tax consequences cease to be merely computational and become structural.

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