Tax & Accounting Blog

IRS Issues New Guidance on Trust and Estate Administration Costs Subject to the 2% Floor

Information Reporting for Wealth Management, ONESOURCE, Tax Information Reporting, Trust Tax September 7, 2012

In light of the Supreme Court’s decision in Knight v. Com., the IRS has withdrawn previously issued proposed regs and, consistent with that decision, provided new guidance on which costs incurred by estates and non-grantor trusts are subject to the Code Sec. 67(a)’s 2% floor for miscellaneous itemized deductions.

In accord with the Knight decision, the proposed regs provide that to the extent (if any) that a portion of an investment advisory fee exceeds the fee generally charged to an individual investor, and that excess is attributable to an “unusual investment objective” of the trust or estate, or to a specialized balancing of the interests of various parties such that a reasonable comparison with individual investors would be improper, that excess is not subject to the 2% floor.

Bundled fees paid by an estate or non-grantor trust, which include costs that are subject to the 2% floor as well as those that are not, must be allocated for purposes of determining the trust’s or estate’s AGI. However, if a bundled fee is not computed on an hourly basis, only the portion of that fee that is attributable to investment advice is subject to the 2% floor.

Taxpayers will not be required to determine the portion of a bundled fiduciary fee that is subject to Code Sec. 67’s 2% floor for taxable years beginning before the date that these regs are published as final in the Federal Register. The IRS likely won’t finalize the regs until 2012 at the earliest. Therefore, it is likely that most calendar year trusts and estates will not be required to unbundle their fees until 2013.