IRS grants nongrantor trusts and estates temporary relief from the unbundling of fiduciary fees

Eliminating at least one compliance headache for estate and trusts filing 2007 income tax returns, the IRS is allowing nongrantor trusts and estate to temporarily disregard the requirement that they unbundle investment advisory management and advisory costs. The IRS’s interim guidance comes shortly after the Supreme Court held in January that costs paid to investment advisors by nongrantor trusts and estates are generally subject to the two percent floor for miscellaneous itemized deductions.

Interim guidance

Under the interim guidance, fiduciaries will not need to determine if any portion of the trustee fees is subject to the two percent floor, including investment advisory fees and other costs that may be subject to the two percent floor. The interim guidance provides taxpayers with retroactive relief; unbundling will generally not be required for tax years beginning before January 1, 2008. Instead, for each tax year, a taxpayer may deduct 100 percent of the bundled fiduciary fee without regard to the two-percent miscellaneous itemized deduction floor.

However, the IRS has cautioned that payments made by a fiduciary to third parties for expenses subject to the two percent floor are “readily identifiable” and must be treated as separate from the otherwise bundled fee.

If you have any questions about how this development affects any trusts that you have set up, please do not hesitate to contact this office. Recasting fee agreements in a way more compatible to a tax deduction under the new rules should be considered among other options.

(Notice 2008-32, IRB 2008-11)