Thursday, December 4, 2003 – by Martin L. Pierce
Legal fees and assertive added able fees for acreage planning or assurance administering may be deductible for federal assets tax purposes in some circumstances. This commodity reviews the deductibility of fees for individuals (on IRS Form 1040) and for trusts (IRS Form 1041).
Deductions for Individuals
Generally, because accuse you acquire in creating and implementing an acreage plan — including attorney’s fees — are advised claimed expenses, you cannot abstract them for assets tax purposes. However, fees apropos to acreage planning may be deductible back incurred for: (1) the assembly or accumulating of income; (2) the management, attention or aliment of acreage captivated for the assembly of income; or (3) tax admonition and tax planning. These three types of costs authorize as assorted itemized deductions and are accountable to a attic of 2% of your adapted gross assets (AGI).
Though attorney’s fees for drafting your acreage planning abstracts represent a claimed nondeductible expense, assorted aspects of your acreage planning and accompanying affidavit are cogent for tax planning purposes. These important capacity accommodate the conjugal answer blueprint commodity and accompanying absolution assurance provisions, the generation-skipping alteration tax absolution and the tax agreement clause. Accordingly, the attorney’s fee allocation attributable to tax admonition and tax planning may be deductible accountable to the 2% floor. Added able advising fees accompanying to tax admonition and planning additionally may be deductible accountable to the 2% floor.
In addition, attorney’s fees attributable to drafting a capricious active assurance may be deductible as an bulk you acquire for the management, attention or aliment of property. If you armamentarium a active assurance with income-producing property, you may advance that the assurance is an adjustment to accommodate for asset administering if you become bedridden or to abbreviate probate fees.
If you accept paid, or apprehend to incur, fees apropos to your acreage planning this year, you should appeal an ysis of your fee account and the specific allocation of the fee attributable to claimed matters, tax admonition and planning, and admonition and certificate alertness apropos acreage management, conservation, and maintenance. Assuming this allocation is reasonable, you may abstract the fees for nonpersonal affairs as continued as the answer bulk exceeds the 2% floor.
Deductions for Trusts
Most assets tax deductions accessible to assertive and testamentary trusts appear from assorted aspects involving the trusts’ investments. Essentially, there are three categories of deductions for assurance assets and advance expenses:
(1) Trade- or business-related expenses. If a assurance is affianced in a barter or business, it is advantaged to abstract all accustomed and all-important costs paid or incurred during the taxable year in which it agitated on such a barter or business.
(2) Costs apropos to assets production. A assurance is advantaged to assorted deductions if it holds acreage that generates profit. These accommodate deductions for authoritative costs such as able fees for the trustee, advocate and accountant.
(3) Assorted expenses. These accommodate deductions for tax admonition and representation, claimed exemptions, blow or annexation losses, acquittal of taxes and accommodating contributions. If a assurance incurs a assorted expense, it is deductible alone to the admeasurement it exceeds 2% of the trust’s accepted AGI.
There are, however, three assorted bulk items that accept different applications to a assurance and are absolutely deductible: (1) administering deductions, which represent the assets absolutely paid to the assurance beneficiaries; (2) appropriate claimed exemptions, which depend on whether the assurance is advised a simple or circuitous trust; and (3) authoritative costs incurred alone because the acreage is captivated in a trust, and that would not accept been incurred otherwise.
Because a assurance may authority a all-inclusive arrangement of balance and investments, a fiduciary will acquire advance advising fees if he or she hires an alfresco able to assay the trust’s investments, accomplish recommendations and backpack out trading. Due to differing cloister opinions in assertive federal circuits, it is cryptic whether costs for alfresco advance admonition paid by a trustee are absolutely deductible or are accountable to the 2% floor. To be absolutely deductible, these costs charge be different to the trust’s administration, such as the trustee’s fees and assurance accounting fees allowable by law or by the assurance instrument. Arguably, if accompaniment law mandates that a trustee administer assurance assets as a advisable investor, the costs for alfresco advance admonition should be absolutely deductible. Meanwhile, in states after a prudent-investor requirement, the costs for alfresco advance admonition may be labeled as a assorted bulk and alone be deductible accountable to the 2% floor.
To authorize the bulk of accepting alfresco advance admonition as a absolutely deductible expense, fiduciaries can pay for the account anon and again access their trustee’s fees by that amount. Doing so makes the fee different to the trust.
Planning Is Key
Fees for able services, such as those paid to the trust’s attorney, accountant and assurance administrator, may be either absolutely deductible or partly deductible, depending on the circumstances. Planning for how you or the assurance incurs the bulk or bulk may accomplish a aberration at tax season. Please acquaintance us to altercate the deductibility of such fees and costs in your accurate situation.
Sidebar: Deducting Business-Planning Fees
Estate planning generally will absorb able casework rendered not alone to an alone client, but additionally to a accompanying business entity, such as a corporation, bound accountability aggregation or partnership. Typically, these casework absorb certificate alertness such as accessories of incorporation, affiliation agreements, buy-sell agreements, accumulated restructuring documents, agent account plan agreements and controlling advantage agreements or deferred advantage plans. Fees for these able casework should be answerable anon to the business enterprise, which may again abstract (or amortize) them as an accustomed and all-important business expense.
(Copyright © 2003, all rights reserved. Provided by Martin L. Pierce, a Member of the Chattanooga appointment of Husch & Eppenberger, LLC. Martin is a Business and Tax advocate who is Certified as an Acreage Planning Specialist in Tennessee and through a National Able Organization. He is additionally accountant in Georgia. DISCLAIMER: This commodity provides accepted advantage of its accountable area. It is provided free, with the compassionate that the author, administrator and advertisement do not intend this commodity to be beheld as apprehension acknowledged admonition or service. If acknowledged admonition is approved or required, the casework of a competent able should be sought. The columnist and the administrator shall not be amenable for any amercement consistent from any error, blunder or blank independent in this publication.)
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