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IRS May Develop Trust Fee Safe Harbors

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The Internal Revenue Service is trying to help administrators of estates and nongrantor trusts cope with a new U.S. Supreme Court ruling.

The court ruled in January, in Michael J. Knight, Trustee of William L. Rudkin Testamentary Trust vs. Commissioner, that trusts and investment advisors can deduct investment advisory fees only to the extent that miscellaneous itemized deductions amount to at least 2% of income.

Before the court issued the ruling, some administrators of estates and nongrantor trusts had operated under the assumption that estates and nongrantor trusts could deduct investment advisory fees without applying the 2% floor for miscellaneous itemized deductions, by using a rule that permits estates and nongrantor trusts to deduct the full cost of estate and trust expenses.

The Supreme Court held in January that trust and estate investment advisory fees are generally not special estate or trust expenses, because many taxpayers that are not estates or trusts pay similar types of investment advisory fees.

The IRS now has announced in IRS Notice 2008-32 that it wants to develop final regulations as quickly as possible to help taxpayers apply the ruling.

“The final regulations may contain one or more safe harbors for the allocation of fees and expenses between those costs that are subject to the 2% floor and those that are not,” IRS officials write in the notice.

The final regulations will address topics such as what happens when a nongrantor trust or estate pays a “bundled fiduciary fee,” which may include some costs that are subject to the 2% floor and some costs that are still fully deductible.

The final regulations may be available to use for taxable years beginning on or after Jan. 1, 2008, but they will not be issued in time for the regulations to apply to 2007 tax returns, officials write.

IRS officials have tried to make up for the gap by issuing temporary guidance in Notice 2008-32.

Under the terms of the interim guidance, taxpayers can get by without determining what portion of a bundled fiduciary fee is subject to the 2% floor.

Instead, for any taxable year starting before Jan. 1, 2008, “taxpayers may deduct the full amount of the bundled fiduciary fee without regard to the 2% floor,” officials write. “Payments to the fiduciary to third parties for expenses subject to the 2% floor are readily identifiable and must be treated separately from the otherwise bundled fiduciary fee.”


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