For example, if you have a living trust that generates income, the legal fees associated with maintaining and preserving your trust are tax-deductible. An example of an income-generating trust would be one that includes rental properties. Estate Planning Fees Were Tax-Deductible, But No Longer. First, estate planning is the general term that covers the distribution of one's assets and property at the time of death to beneficiaries.
It includes the creation of legal documents such as trusts and wills, as well as directives such as durable powers of attorney and living wills. The Tax Cuts and Jobs Act (TCJA), while reducing taxes for most, increased taxes for a few. One group of those few taxpayers for whom taxes rose under the TCJA were certain trusts and estates (usually those with high investment advisory fees or certain other expenses). The problem for these trusts is that the TCJA eliminated miscellaneous itemized deductions for everyone, but trusts don't have a standard deduction to draw on like individual taxpayers do.
Lower deductions equal higher taxable income, and the tax categories and rates applicable to trusts (although slightly cut under the TCJA) are generally not much different from pre-TCJA tax categories and rates. The IRS recently finalized regulations that provide guidance on what expenses a trust can still deduct and, more importantly, for those advising trustees or beneficiaries, when those advisory fees are still deductible. The fees you pay to establish a revocable trust are generally considered personal expenses, which are not deductible for tax purposes. However, if you received tax or tax planning advice in relation to the trust, or if the trust includes provisions for the production or collection of income from the assets included in the trust, you may be able to deduct part of the fees.
These deductions are considered valid by the Internal Revenue Service and can be claimed as various itemized deductions. Under these rules, administrative expenses of an estate or trust that would normally be subject to this 2% limitation were deductible in full as long as they were paid or incurred in connection with the administration of the estate or trust, and would not have been incurred if the property was not in the trust or estate. The proposed Regulation confirms that excessive deductions normally taken by beneficiaries following the termination of an estate or trust pursuant to Section 642 (h) (retain their character for the beneficiary, meaning that the character of deductions remains the same when transferred to a beneficiary as a result of a rescission of an estate or trust. Depending on your situation, your lawyer may recommend that you establish a trust as part of your estate plan.
In general, the proposed regulations confirm that a trust or estate can still take a deduction for expenses that would not have been incurred if the property to which the expenses relate were not in the hands of a trust or estate. Many estate planning lawyers already bill separately for tax-deductible services, but it's still a good idea to broach the issue with your lawyer early in the process. Other examples of pay-as-you-go services that are no longer deductible include investment counseling for estate-held trusts and preparing trust taxes. Other examples include trust tax preparation charges, account custody fees, and investment advice for estate-owned trusts.
Many estate planning lawyers have an assistant or small department to help you transfer assets to the trust, but not all lawyers do. In addition, the proposed regulations confirmed that a trust or estate can still deduct the personal exemption allowed for probate and non-granting trusts, and the distribution deduction for income that is distributed to beneficiaries of the trust or estate. .
Leave Message