The Internal Revenue Service is preparing to come up with rules for itemizing expenditures on management of estate and non-grantor trusts.
IRS officials have described the regulations they are writing in “Section 67 Limitations on Estates or Trusts” a notice of proposed rulemaking that appears today in the Federal Register.
The Internal Revenue Code permits taxpayers to itemize and deduct estate administration costs if the total estate administration costs exceed 2% of adjusted gross income.
But, taxpayers can deduct some estate administration costs, even if the total fails to exceed the 2% floor, if the costs “would not have been incurred if the property were not held in such estate or trust.”
Federal appellate courts have interpreted those rules in different ways in different regions of the country, and, because of that conflict, “deductions of similarly situated taxpayers may or may not be subject to the 2% floor, depending upon the jurisdiction in which the executor or the trustee is located,” IRS officials in a preamble to a draft of the proposed rule.
Officials came up with the proposed rule in an effort to provide a uniform standard for deciding how to treat estate and non-grantor trust expenses, officials write.
Under the proposed regulations, treatment of the costs would depend on the type of services provided, rather than on taxpayer labels for the services, officials write.
“Taxpayers may not circumvent the 2% floor by ‘bundling’ investment advisory fees and trustees’ fees into a single fee,” officials write.
If a vendor bundles fees, an estate or trust must use a reasonable method to determine how much of a fee is subject to the 2% floor and how much is not, officials write.
In the proposed rule, officials describe fiduciary accountings, judicial estate or trust filings, fiduciary bond premiums, and communication with beneficiaries as some of the types of services that are unique to estate and trust administration and should not be subject to the 2% floor on miscellaneous itemized deductions.
A copy of the notice of proposed rulemaking is on the Web