Trustee Fee Deduction for a irrevocable grantor trust(IDGT)

[LostSoul1]

Fiduciary fee (professional trustee fee) are deductible for Non Grantor Trusts under section 67(e), correct?

What happens if the trust is a grantor trust- Can the professional trustee fee still be deducted? If so, I don't see it under miscellaneous deductions on turbotax. Must I itemize to get this deduction? Is there a certain amount it needs to exceed for one to get the deduction?

Thank you!

[tagteam]

It would indeed have to be an unusual circumstance for a grantor trust to be able to deduct a fiduciary fee.

If so, however, it would be deducted on Schedule 1, Line 24z.

[LostSoul1]

Thank you for your response.

what would the unusual circumstance that would allow the deduction to be acceptable be? Would an irrevocable trust that is a completed gift treated as a grantor trust for tax purposes only, in which the grantor has no other rights qualify? Would it matter if the spouse is a beneficiary? Lastly, how do I enter the info on turbotax?

Thank you.

[Mike9241]

as a grantor trust, I can't come up with a situation where the fees would be deductible currently.  prior to 2018, only the amount that exceeded 2% of adjusted gross income would have been deductible if a taxpayer itemized (IRC sec. 67). tax law changes effective for 2018-2025 eliminated this deduction for federal income tax purposes. some states may still allow the deduction.

Note. Fiduciary fees are allowable
under section 67(e) if they are costs that
are paid or incurred in connection with
the administration of an estate or a
non-grantor trust that would not have
been incurred if the property were not
held in such estate or trust. See Final
Regulation - TD9918 and Regulations
section 1.67-4 for more information.

even under 67(e) for non-grantor trusts only costs that are paid or incurred in connection with the administration of the estate or trust that would not have been incurred if the property were not held in such estate or trust are deductible

https://www.govinfo.gov/content/pkg/FR-2020-10-19/pdf/2020-21162.pdf 

https://www.law.cornell.edu/cfr/text/26/1.67-4 

[tagteam]

I agree with @Mike9241; it is difficult to imagine a scenario where fiduciary fees would be deductible under any ordinary and typical circumstances.

There is one scenario where a Champ on this board deducts fiduciary fees for a family member who has a trust that is actually considered a grantor trust, but the situation there was that the trust was established and a fiduciary was ordered by a court. Again, this is an extremely rare and somewhat bizarre scenario.

For virtually any other scenario, paying fiduciary fees (to a professional) for a grantor trust would be akin to paying an investment advisor and, therefore, not deductible after tax reform.

[tagteam]

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@LostSoul1 wrote:

what would the unusual circumstance that would allow the deduction to be acceptable be? 

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I outlined that in my post above (at least one circumstance). Again, exceedingly rare.

[tagteam]

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@LostSoul1 wrote:

Would an irrevocable trust that is a completed gift treated as a grantor trust for tax purposes only, in which the grantor has no other rights qualify?

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Without further details, what you have described appears to be an IDGT (intentionally defective grantor trust).

If that is the case, you really do need to stay in touch with, and receive advice from, a tax and legal professional.

On the other hand, an IDGT is treated the same as any other grantor trust for federal income tax purposes (but not for estate tax purposes).

[LostSoul1]

You are spot on!

I am trying to understand the tax implications of an IDGT and NGT and got conflicting information for two professionals (cpa said One could and lawyer said One couldn’t deduct corporate trustee fee)  and can’t figure out where I could find the right answer and so trying to find it out here. 

here is what I’ve gathered so far for the tax treatments of IDGT vs NGT: Basically for an NGT margin seems to be a lot easier to take a deduction on given the low standard deduction. Also the fiduciary trustee fee is definitely deductible. 

trying to understand how these work for an IDGT: since everything flows to my returns, assuming margin interest won’t matter unless I itemize and total amount exceeds SD (assuming margin is used for investment/ business purposes). However I can’t find anything specific for the professional fee. Based on what I understand so far from the boards above, I shouldn’t take a deduction… 

[tagteam · Accepted solution]

You appear to have a good handle on the issues, including the fact that fiduciary fees are definitely deductible for a nongrantor trust.

Regardless, I agree that it would be prudent (and the proper treatment) not to deduct trustee fees here unless there are unusual circumstances (such as a scenario where you are temporarily incapacitated which is, admittedly, an imperfect example).

[LostSoul1]

Deductibility of margin income was in context of requesting a deduction for investment expenses and not trust related fiduciary expenses- in this case, the expense could be itemized for both IDGT (but SD is over 20k and this is a disadvantage) and a NGT(SD is less than 1k- so mostly ab advantage), correct?

lastly, I read that one could recategorize qualified dividends as regular dividends so they can offset margin interest: can only a part of the qualified dividends be recategorized, to the extent margin loan deduction use could be optimized? How would one make such as request on the tax forms and get the deduction. 
thank you!

[tagteam]

Yes, investment interest is deductible as an itemized expense on Schedule A to the extent of your investment income from interest.

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[tagteam · Accepted solution]

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@LostSoul1 wrote:

.....one could recategorize qualified dividends as regular dividends so they can offset margin interest: can only a part of the qualified dividends be recategorized, to the extent margin loan deduction use could be optimized? How would one make such as request on the tax forms and get the deduction. 

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Yes, you can allocate qualified dividends as ordinary to offset that part of the interest expense that would not otherwise be deductible.

In TurboTax, you would make the allocation in the Investment Interest Expenses section under the Deductions & Credits tab

[LostSoul1]

Thank you all so much for your help. 

[maglib]

@LostSoul1   I have been researching this and found numerous articles saying that yes deductible if a COMPLEX or SNT:

COMPLEX TRUST

Example Two: In 2018, the taxable income of an irrevocable trust is $77,000. $30,000 is from interest and $47,000 is from non‐qualified dividends. Beneficiary A is the sole beneficiary of the trust and has no other personal income or deductions. The trust has the following expenses: fiduciary fees 10,000, Legal Fees 5,000, accounting fees $1,500 and investment advisory fees of $25,000. The Trust is a separate taxable entity and the beneficiary is not the owner of any portion of Trust under I.R.C. § 671. The trust is a complex trust and qualifies as a Qualified Disability Trust. No distributions were made to or for the benefit of the beneficiary in 2018. The total tax liability for the Trust is calculated as follows:

Taxable Income for Trust Taxable Income $30,000.00 Dividends $47,000.00 Total Income $77,000.00 Less Deductions Trustee fees $10,000.00 Legal Fees $ 5,000.00 Accounting fees $ 1,500.00 Investment advisory fees $23,871.00 Taxable Income for Trust Gross Income $36,624.00 Less Exemption (QDT) $ 4,150.00 Taxable Income $32,579.00 2018 Trust Tax Liability $10,441.00 Medicare Surtax 3.8% $ 1,238.00 Total Federal Tax Trust $11,679.00 2018 Beneficiary Tax Liability $ 0.00

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.

———————————————

Contact Information
For additional information concerning this Alert, please contact:
 

Private Client Services
• David H. Kirk	(202) 327-7189
• Justin Ransome	(202) 327-7043
• Steve Goldman	(617) 587-9014

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ENDNOTES

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.

[tagteam]

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@maglib wrote:

@LostSoul1   I have been researching this and found numerous articles saying that yes deductible...

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First of all, @maglib, you're responding to a post that is 2 1/2 years old. Do you suppose the person who posted is still around?

Further, it is abundantly clear that fiduciary fees are deductible by nongrantor trusts, regardless. However, this is not one of those; it is a grantor trust. As such, the fee is currently not deductible at all between 1/1/2018 and 12/31/2025 (look at the language in Footnote 2 in your post).

Also, even if the fee in this instance would be deductible, then as a grantor trust it would be a miscellaneous itemized deduction subject to the 2% floor (which it also states in your Footnote 2) and not currently deductible.

Hence, you are wrong in your assessment that this fee is deductible in this instance.

EDIT: Your edited first line is irrelevant and has not utility since the trust that is the subject of this thread is neither a complex (nongrantor) trust nor an SNT. Try reading the original post.