Proposed Regulations to Require Unbundling of Fiduciary Fees


By Michael Darpino

After years of delay, the IRS has issued new proposed regulations regarding the deductibility of fiduciary fees under Section 67(e). Banks and trustees may need to reorganize how they do business in order to facilitate compliance with upcoming requirements.

As a general rule, estates and non-grantor trusts may claim miscellaneous itemized deductions only to the extent they exceed two percent of the entity’s adjusted gross income. An exception provides that costs are deductible in full if (1) they are paid or incurred in connection with the administration of an estate or trust and (2) they would not have been incurred if the property were not held in such estate or trust.

An area of uncertainty has arisen due to the fact that many fiduciaries charge bundled fees for their services. A bundled fiduciary fee is a unitary charge for a package of services, including investment advisory costs, trustee commissions, and tax return preparation fees. If itemized separately, some of these fees would be fully deductible under the exception, while others would be subject to the two-percent floor.

In 2008, the Supreme Court in Knight v. Commissioner held that, as a general rule, investment advisory fees incurred by an estate or trust are subject to the two-percent floor. The Court did not address whether tax preparers are required to disaggregate bundled fiduciary fees to isolate the portion attributable to investment advice. In response to concerns that unbundling fees would cause significant administrative hardship, the IRS has issued temporary interim guidance each year since 2008 that permits bundled fees to be deducted in full, pending final regulations.

On September 7, 2011, the IRS issued proposed regulations that will require return preparers to allocate bundled fiduciary charges between fees that are deductible in full and fees that are subject to the two-percent floor. Consistent with the Knight decision, the portion of a bundled fee attributable to investment advisory fees will be subject to the two-percent floor. Only incremental costs attributable to an unusual investment objective of the trust or estate will remain fully deductible.

Bundled fees not computed on an hourly basis will remain fully deductible other than the portion that is allocable to investment advisory fees. In general, any reasonable method may be used to unbundle a fiduciary fee.

A public hearing on the proposed rulemaking is scheduled for December 19, 2011. Comments are currently requested regarding the clarity of the rules and how they can be made easier to understand. Specifically, the IRS and the Treasury seek methodologies to estimate the portion of a bundled fee that is attributable to investment advice. Affected practitioners are encouraged to voice their opinions and concerns.
I.R.C. §67(a), §67(e)
Knight v. Commissioner, 552 U.S. 181 (2008).
Prop. Treas. Reg. 1.67-4.
Internal Revenue Service Notice 2008-32.
Internal Revenue Service Notice 2011-37.

© 2011 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.
This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.

You’ve heard our thoughts… We’d like to hear yours

The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at contactSD@schneiderdowns.com.

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.

© 2019 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.