IRS Clarifies Deductibility of Advisory Fees by Estates and Trusts

Posted September 19th, 2011

The IRS has reissued proposed regulations that clarify when a nongrantor trust’s (NGT) or estate’s investment advisory expenses are fully deductible for income tax purposes. Most advisory expenses are subject to what can be a severe restriction that greatly reduces their deductibility.

Until the Supreme Court case of Knight v. Commissioner was decided, executors and trustees were uncertain how the floor applied to estates and NGTs. Knight clarified which of an estate’s or NGT’s expenses are subject to the 2 percent floor for itemized deductions. Expenses that are “customarily” or “commonly” incurred when property is held by an individual are subject to the 2 percent floor when they are incurred by an estate or nongrantor trust. Expenses that are unique to estates and NGTs are not subject to the floor.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of the Knight decision in Advisor’s Journal, see Knight v. Commissioner – U.S. Supreme Court Rules On Important Issue Regarding Income Taxation of Trusts (CC 08-10).

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