IRS Offers Guidance for Deductibility of Certain Expenses for Nongrantor Trusts and Estates

SD Medallion Services

By Laura DelFratte

Historically, it was unclear whether certain administrative costs paid by trusts and estates were deductible in full or if the expenses were only deductible to the extent those costs exceeded 2% of the taxpayer's income.  In 2008, in Knight v. Commissioner, 552 U.S. 181, 128 S. Ct. 782, the Supreme Court ruled on whether investment fees are subject to the 2% floor for trusts and estates.  The Court found that investment fees are in fact subject to the 2% floor, holding that these types of costs are only fully deductible for trusts and estates if the expense is "uncommon, unusual or unlikely for an individual to incur."  The IRS and the Treasury Department issued temporary guidance to fiduciaries while they considered how and whether to implement the Supreme Court's decision in the final regulations.  On May 8, 2014, the IRS has published the final regulations relating to administrative expenses paid by trusts and estates. 

The new regulations have adopted a standard that is similar to the one set by the Supreme Court.  According to the new regulations, costs are subject to the 2% floor if the cost "commonly or customarily would be incurred by a hypothetical individual owning the same property." 

The final regulations concentrate on the deductibility of costs of ownership, tax return preparation costs, investment advisory fees, and appraisal fees.  The following chart summarizes the IRS guidance on the deductibility of these expenses:



Subject to 2% Floor

Fully Deductible


Ownership Costs


Condominium fees, insurance premiums, maintenance, lawn services, automobile registration, and insurance costs


Any cost that is not subject to the 2% floor for individuals such as real estate taxes and costs incurred in connection with a trade or business for the production of income


Tax Return Preparation Costs

Individual income tax returns (other than final return), gift tax returns, returns for a sole proprietorship or a retirement plan

Final individual income tax return, estate and generation-skipping transfer tax returns, and fiduciary income tax returns


Investment Advisory Fees

Ordinary investment income expenses that would be incurred if assets are held by an individual

Any additional investment advisory fees that are above and beyond what would be charged to an individual, such as an unusual investment objective or the need to balance the interests of various parties


Appraisal Fees

Appraisals commonly used for individuals, such as insurance purposes

Appraisals for an estate tax return, generation-skipping tax transfer return, or for purposes of trust distributions


Certain Fiduciary Expenses

Expenses commonly incurred by individuals

Probate court fees and costs, fiduciary bond premiums, legal publication costs of notices to creditors or heirs, the cost of certified copies of the decedent's death certificate, and costs related to fiduciary accounts

Bundled Fees

When fees are charged for services and a portion of those fees are attributable to expenses subject to the 2% floor and a portion of the expenses are not subject to the floor, any reasonable method may be used to allocate the bundled fee between those costs.  However, if a bundled fee is not computed on an hourly basis, only the portion of that fee that is attributable to the investment advice is subject to the 2% floor.    

This guidance is effective for taxable years beginning on or after May 9, 2014. 

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

© 2018 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.