January 23, 2018 Deductibility of trustee fees after the Tax Cuts and Jobs Act The Tax Cuts and Jobs Act (the Act), signed on December 22, 2017 and generally effective on January 1, 2018, added new Section 67(g), eliminating all "miscellaneous itemized deductions" for trusts and estates for tax years 2018 through 2025. Fiduciaries and financial institutions have expressed concern over what appears to be some ambiguity in this new section. Do fiduciary fees1 and other above-the-line trust and estate administration expenses fall into the category of "miscellaneous itemized deductions" thereby eliminating them as deductions? Support for asserting fees are deductible We expect the IRS to issue guidance to clarify this issue. While we wait for further guidance, it is worth noting that there is support for a position that these fees are still deductible. 1. Above-the-line trust and estate administration expenses, such as fiduciary fees, are not 'miscellaneous itemized deductions' Section 67 allows a deduction for certain "miscellaneous itemized deductions" only to the extent the amount exceeds 2% of adjusted gross income (AGI). Section 67(e), however, carves out an exception for estates and nongrantor trusts. It says that certain deductions are allowable in arriving at AGI (that is, they are "above-the-line"), and therefore are not subject to the 2% floor, if the amount of the claimed deduction: (1) is paid or incurred in connection with the administration of the estate or trust; and (2) would not have been incurred if the property were not held in the trust or estate. A fiduciary fee is a typical example of such an administration expense that would not commonly or customarily be incurred by an individual. Therefore, a fiduciary fee related to trust or estate administration is an allowable deduction in arriving at AGI, and is not subject to the 2% floor. If fiduciary fees are not subject to the 2% floor, are they nevertheless considered miscellaneous itemized deductions? Section 67(b) defines "miscellaneous itemized deductions" as "the itemized deductions other than" deductions that may be claimed under certain specifically enumerated code sections, such as interest and taxes. The term "itemized deductions" is defined in Section 63(d) as "the deductions allowable under this chapter other than — (1) the deductions allowable in arriving at adjusted gross income" and (2) certain other deductions not relevant here. Because fiduciary fees are an allowable deduction in arriving at AGI, they are not "itemized deductions." If fiduciary fees are not "itemized deductions," they cannot be "miscellaneous itemized deductions" as defined in Section 67(b). This supports a position that administration expenses that are unique to an estate or trust, such as fiduciary fees, are still deductible under the new law. Another example of such a unique administration expense is the tax preparation fee for estates and nongrantor2 trusts. 2. Congressional intent is instructive The Committee Report for the provision amending Section 67 says: "The Senate amendment suspends all miscellaneous itemized deductions that are subject to the [2%] floor under present law" (emphasis added). The Conference Agreement followed the Senate amendment. As discussed previously, certain trust and estate administration expenses, such as fiduciary fees related to administration and tax preparation fees for a trust, are not subject to the 2% floor under present law. Therefore, it seems that Congress may have intended for these fees to remain deductible. 3. No alternative minimum tax add-backs on Schedule I When calculating alternative minimum tax (AMT) liability, a taxpayer is not allowed certain deductions, including miscellaneous itemized deductions, and must add these deductions back when calculating his alternative minimum taxable income. Schedule I, the AMT form applicable to estates and trusts, has historically only added back miscellaneous itemized deductions that were subject to the 2% floor. This suggests that the IRS may not seem to consider "above-the-line" trust and estate administration expenses to be "miscellaneous itemized deductions." Otherwise, the IRS likely would have included those expenses as an add-back on Schedule I for AMT purposes, instead of limiting the add-back to "miscellaneous itemized deductions subject to the [2%] floor."3 Implications To determine the treatment of their fiduciary fees and administrative expenses, fiduciaries and financial institutions should seek the assistance of professionals well-versed in the taxation of estates and trusts and attuned to developments in IRS thinking and guidance. ———————————————
——————————————— 1 Under the "unbundling" regulations, Reg. Section 1.67-4(c), only that portion of a bundled fiduciary fee allocable to trust administration is considered an allowable deduction in arriving at adjusted gross income (AGI). When we refer to "fiduciary fee," we mean that portion of the bundled fee allocable to trust or estate administration. Any portion allocable to investment management — an expense commonly or customarily incurred by an individual — is a miscellaneous itemized deduction, and subject to the 2% floor. Thus, trustees have been required to "unbundle" any fees that contain both categories of expense in order to distinguish which portion is subject to the 2% floor. Under the Act, expenses subject to the 2% floor under pre-2018 law will be entirely disallowed in tax years 2018 through 2025. 2 For grantor trusts, items of income and expense pass through to the grantor, and the trust is disregarded as a separate taxable entity. Thus, administration expenses for a grantor trust are attributed to the grantor/owner. Under the law that was in effect for 2017, those expenses were subject to the 2% floor. Under the new law, for tax years beginning after December 31, 2017 and before January 1, 2026, the entire deduction will be disallowed. 3 Form 1041, U.S. Income Tax Return for Estates and Trusts, line 15c, emphasis added. | |||||||||
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