QBI Deduction for Trust

The new tax law created a qualified business income (QBI) deduction for taxpayers other than regular “C” corporations. The law allows the "combined qualified business income " amounts plus 20% of the aggregate amount of qualified real estate investment trust dividends. This amount is 20% of the QBI for each trade or business if the taxpayer's taxable income is under the threshold. For purposes of a determining taxable income of a non-grantor trust, the determination is done before the distribution deduction and exemption amount.

For this very reason, the enactment provides one more reason it’s advisable to create separate trusts for individual beneficiaries instead of a single trust. A single trust for the benefit of all the children, and at first glance may be less expensive to implement. But depending on the economics of the investment, the ages and risk tolerance, a separate trusts for each child maybe more advisable and allows for those trusts to create separate sub trusts for succession planning.

Two or more trusts are treated as one trust if they have substantially the same grantor or grantors and substantially the same primary beneficiary or beneficiaries, and a principal purpose of the trusts is the avoidance of federal income tax. The Service ruled that if a trust is divided into sub trusts and each sub trust has a different primary beneficiary, each sub trust will be treated as a separate trust for federal income tax purposes. Even though the proposed regulations creates a presumption of tax avoidance if separate trusts create a significant income tax benefit, the test of primary beneficiaries being the same is still required for aggregation of trusts. Therefore, the creation or partition of trusts for separate beneficiaries should not violate Sec. 643(f).

The threshold for nongrantor trusts is $157,500. If the taxpayer's income exceeds the threshold, the amount is the lesser of:

(1) 20% of the QBI for each trade or business or

(2) the greater of (a) 50% of the W-2 wages of the qualified trade or business or (b) the sum of 25% of the wages of the qualified trade or business plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property.

The deductible amount is the combined QBI amount, limited to 20% of the excess, the taxpayer's taxable income for the tax year over the taxpayer's net capital gain for that tax year.