On May 9, 2014, the IRS published final regulations pertaining to certain costs incurred by estates and non-grantor trusts, and finally brought an end to some controversial issues surrounding the deductibility of certain costs.
Code Section 67(e)(1) allows for the full deductibility of certain fiduciary costs without limitation to the 2% adjustment for costs which “are paid or incurred in connection with the administration of the estate or trust and which would not have been incurred if the property were not held in such trust or estate.”
The final regulations identify which costs are subject to the 2% limitation and which costs are not subject. They basically have retained the “commonly or customarily” standard in determining which costs are subject to the 2% limitation. The regulations are applicable for all tax years beginning after December 31, 2014 and they cover the following five categories of expenses:
- Ownership Costs – Typically subject to the 2% limitation – including the following: partnership costs deemed to be passed through to and reportable by a partner if these costs are defined as miscellaneous itemized deductions. This could include such costs as condo fees, insurance premiums, maintenance costs, etc. The final regulations identify one ownership cost that is NOT subject to the 2% limitation and that is for state and local real property taxes.
- Tax Preparation Fees – fees for the following are NOT subject to the 2% limitation: estate and generation-skipping transfer tax returns, fiduciary income tax returns and the decedent’s final income tax returns. All other tax return preparation fees are subject to the 2% limitation.
- Appraisal Fees – 3 types of appraisal fees that are NOT subject to the 2% limitation: (a) appraisal obtained to determine the fair market value of assets as of the decedent’s date of death; (b) for purposes of making distributions; and (c) in order to accurately prepare the estate’s or trust’s tax returns, including a generation-skipping return. All other appraisal fees would be subject to the 2% limitation.
- Investment Advisory Fees – under the “commonly or customarily” standard, the final regulations appear to require advisory fees to be subject to the 2% limitation, as an individual taxpayer would likely incur similar fees for investments not in an estate or trust account.
- Other Fiduciary Fees Specifically Excluded – the final regulations specifically identify some expenses that are NOT subject to the2% limitation which include probate court costs, costs of legal publications and notices to creditors or heirs, certified copies of the decedent’s death certificate; fiduciary bond premiums and costs related to fiduciary accounts.
While the final regulations provide some much needed clarification on the 2% limitation of certain trust and estate related expenses, planning opportunities still exist. Certain expenses are still able to be selected for either a deduction on the estate tax return or as an income tax deduction on the estate’s fiduciary income tax return, but not both.
By: Aric Salgat
Photograph: Wikipedia.org\Fair Lane, Henry Ford Estate, Dearborn MI