Deductibility of Fiduciary Expenses: IRS Publishes Final Regulations on Deductibility of Fiduciary Expenses Incurred by Estates and Trusts

Sullivan & Cromwell LLP - May 12, 2014

On May 8, 2014, the Treasury Department and the Internal Revenue Service (“IRS”) adopted final regulations (the “Final Regulations”) governing the treatment of expenses incurred by estates and non-grantor trusts, including ownership costs, tax preparation fees, investment advisory fees, appraisal fees and others (collectively, “fiduciary expenses”), for purposes of the limitations on the deduction of miscellaneous itemized deductions. Consistent with the Supreme Court’s reasoning and holding in Knight v. Commissioner of Internal Revenue, the Final Regulations provide that fiduciary expenses that “commonly or customarily” would be incurred by a hypothetical individual holding the same property are deductible only to the extent the fiduciary expenses (together with other miscellaneous itemized deductions) exceed two percent of the relevant taxpayer’s adjusted gross income (“AGI”). The Final Regulations further require that an estate or non-grantor trust that pays a single “bundled” fee covering both costs that are fully deductible and costs that are not must allocate the fee between the two types of costs in a reasonable manner.