Tax Deductibility of Trustee’s Fees

Take-Away: Confusion was created by the 2017 Tax Act when it comes to the deductibility of trustee’s fees. The Treasury Department just released a Notice that promises some guidance on the continued income tax deductibility of trustee fees under the 2017 Tax Act.

Background: The 2017 Tax Act eliminated itemized income tax deductions (sometimes referred to as tax deductions that exceeded 2% of the taxpayer’s adjusted gross income, aka the 2% floor. Some expenses incurred by trusts clearly fell under the itemized deductions, yet other expenses were not listed as itemized income tax deductions.

Trustee fees (if unbundled from other services provided by the trustee) were generally not subject to the 2% floor for itemized deductions as those fees were expenses not normally incurred by individual taxpayers, i.e. they were unique to trusts. Consequently, trustee fees were not usually treated as, or subject to, the 2% floor as an itemized income tax deductions unlike other expenses often incurred by an irrevocable trust such as investment advisor fees.

Unfortunately, the 2017 Tax Act’s contains somewhat inconsistent provisions or language when compared to other Tax Code sections that were not formally altered or eliminated by the 2017 Tax Act, resulting in confusion if the income tax deduction available to an irrevocable trust for the payment of trustee fees was also eliminated when all other itemized income tax deductions disappeared. [You will recall that the 2017 Tax Act was passed with haste facing an artificial deadline, which may explain, in part, some internal inconsistencies between untouched Tax Code provisions, and the elimination of other Tax Code provisions.

Treasury Notice: In the recent Treasury Notice 2018-61, the Service announced that it will soon publish regulations, with examples, of when/how trustee fees will continue as a trust’s income tax deduction even when other itemized income tax deductions are no longer available to an irrevocable trust. Other expenses also commonly incurred in the administration of an irrevocable trust may also ‘reappear’ as tax deductions that many thought were long gone. Apparently Treasury will be soliciting comments on the proposed Regulations.