Unbundling Fiduciary Fees

Recently, the Internal Revenue Service (IRS) issued final guidance on Internal Revenue Code (IRC) Section 67 as it pertains to a 2 percent floor for miscellaneous itemized deductions. This is important to fiduciaries of non-grantor trusts and estates because it will impact what fees can be deducted for the taxable year. The issue stems from several court cases, including a United States Supreme Court case, that placed confusion regarding the generally held notion that all fees and expenses associated with trust and estate administration were deductible.

The specific question pertains to a 2 percent floor and whether administration expenses, in aggregate, must exceed 2 percent of the adjusted gross income prior to being deductible. Before this confusion, a fiduciary could simply bundle all their administration expenses, classify it as such, and not concern themselves with the 2 percent floor. However, the various court interpretations have interjected confusion regarding fee bundling and whether each fee inside the bundle is subject to the 2 percent floor.

The guidance issued by the IRS attempts clarify the problem. Although the expenses can still be bundled, they must be bundled as expenses subject to the 2 percent floor and expenses that are not. This is much simpler in theory than in practice. Determining whether an expense falls into one category or the other remains tricky. Ultimately, this means that all expenses incurred by fiduciaries in the administration of a non-grantor trust or estate must be unbundled and classified. Although the IRS guidance lists specific expenses, it is not an exhaustive list. Unfortunately, there is not a perfect solution to this process and great care must be taken in the classification process.

© 2014 Parsonage Vandenack Williams LLC

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