Published October 24, 2014

Certain Trust and Estate Expenses–Fully Deductible or Not?

New guidance has been issued by the Internal Revenue Service (IRS) addressing costs incurred by estates and trusts. The recent regulation clarifies which expenses are fully deductible and which expenses are limited based on income levels.

The IRS’ criteria for a fully deductible expense is any expense that is both incurred in connection with the administration of the estate or trust and incurred due to the property being held in such estate or trust. Alternatively, expenses are limited if they would commonly be incurred if the same property were instead held by an individual. The limitation is 2% of the trust’s or estate’s adjusted gross income (AGI), meaning the sum of these certain expenses can only be deducted after subtracting 2% of the trust’s or estate’s AGI.

The following expenses are fully deductible:

  • Tax preparation fees for all estate returns, generation-skipping transfer gift returns, fiduciary income tax returns, and the decedent’s final individual tax return
  • Court costs and appraisal fees for determining value of property at decedent’s death
  • Investment advisory fees beyond the amount normally charged to an individual investor
  • Trustee fees

The following are examples of limited deductions:

  • Tax preparation fees for any returns not explicitly stated above
  • Any fees brought on by being the owner of the property (condominium fees, insurance premiums, etc.)
  • Costs for defense of any claims against the estate or trust
  • Investment advisory fees up to the amount normally charged to an individual investor
  • Appraisal fees not incurred at decedent’s death

The final part of the regulation deals with the issue of bundled fees. Previously, estates and trusts would group limited expenses with unlimited expenses in order to get a higher deduction and lower tax payment. Now, any bundled expenses must be allocated between costs that are subject to the 2% floor and costs that are not, using a reasonable method as defined by the IRS.

If you have questions on the deductibility of your trust or estate expenses or if we can assist with your trust and estate planning needs, please contact the expert listed below at PYA, (800) 270-9629.

WE ARE REQUIRED BY IRS CIRCULAR 230 TO INFORM YOU THAT THE FOLLOWING DISCUSSION WAS NOT INTENDED OR WRITTEN TO BE USED, AND IT CANNOT BE USED, NOR RELIED UPON, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING ANY PENALTIES THAT MAY BE IMPOSED UNDER FEDERAL TAX LAW. THE ADVICE WAS WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE TRANSACTIONS OR MATTERS ADDRESSED IN THE DISCUSSION. EACH TAXPAYER SHOULD SEEK ADVICE BASED ON ITS PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.

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