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Final Regulations on Miscellaneous Itemized Deductions of Estates and Trusts

The final regulations clarify that an expense is subject to the 2% floor for miscellaneous itemized deductions to the extent that:

  • it is a miscellaneous itemized deduction as defined in the Code;
  • it is incurred by an estate or non-grantor trust; and
  • it is commonly or customarily incurred by a hypothetical individual holding the same property, based on the type of product or service rendered to the estate or non-grantor trust.

Ownership costs. Ownership costs, which are costs chargeable to or incurred by a property owner simply by reason or being of the owner, are generally subject to the 2% floor. Some examples include partnership costs passed through to a partner that are defined as miscellaneous itemized deductions, condominium fees, insurance premiums, maintenance and lawn services, and automobile registration and insurance costs.

The final regulations clarify that ownership expenses such as real estate taxes and trade or business expenses may still be fully deductible under other tax provisions.

Tax preparation fees. An exclusive list of tax return preparation fees that are not subject to the 2% floor are set forth in the regulations; specifically, costs relating to estate and generation-skipping transfer tax returns, fiduciary income tax returns, and the decedent's final individual income tax return. The cost to prepare any other tax return, including a gift tax return, is subject to the 2% floor.

Investment advisory fees. Fees for investment advice are generally subject to the 2% floor for miscellaneous itemized deductions. However, the portion of an investment advisory fee that exceeds the fee generally charged to an indvidual, due to an estate or trust's unusual investment objective or a required specialized balancing of various parties' interests, is not subject to the limitation.

Appraisal fees. Appraisal fees incurred to determine the fair market value of assets as of the decedent's date of death (or the alternate valuation date) for purposes of making distributions, or as otherwise required to properly prepare the estate's or trust's tax returns, or a generation-skipping transfer tax return, are not subject to the 2% limitation. However, appraisals for other purposes, such as insurance, are subject to the 2% threshold.

Bundled fees. The final regulations require a bundled fee to be allocated between its component costs that are subject to the 2% floor and costs that are not. If a bundled fee is not computed on an hourly basis, only the portion attributable to investment advice is subject to the 2% floor. However, if a payment is made to a third party out of the bundled fee that would have been subject to the floor if it had been paid directly, it must be allocated as a cost subject to the 2% floor. Bundled fees can be allocated by any reasonable method; however, the regulations provide a nonexclusive list of facts to consider in determining whether allocation is reasonable.

Other fiduciary expenses. Certain other fiduciary expenses are not subject to the 2% floor, including probate court fees and costs; fiduciary bond premiums; legal publication costs of notices to creditors or heirs; the cost of certified copies of the decedent's death certificate; and costs related to fiduciary accounts.

Date: June 30, 2014