The IRS has postponed the effective date of final regulations (TD 9664) on the application of the two percent floor for miscellaneous itemized deductions (including bundled fees) incurred by an estate or trust. In response to concerns about the regulations’ May 9, 2014, effective date, the IRS has decided that the regulations will not apply to any trust or estate until tax years beginning on or after January 1, 2015.
Miscellaneous itemized deductions
An individual can only deduct miscellaneous itemized deductions that exceed two percent of the individual’s adjusted gross income. The same two-percent threshold applies to the costs of administering an estate or trust. However, trust and estate expenses are fully deductible (and are not reduced by the two percent floor) if the costs were related to trust or estate administration and were not likely to be incurred by an individual. The final regulations identified fiduciary costs that were fully deductible, such as certain appraisal or tax preparation fees, and fiduciary costs subject to the two-percent floor, such as investment advice.
A bundled fee, such as a fiduciary’s commission, attorney’s fee, or accountant’s fee, is a single fee paid by a trust or estate that includes both categories of costs: costs that are fully deductible, and costs that are subject to the two-percent floor. The final regulations require that bundled fees be “unbundled” and allocated between these two categories. (However, if a bundled fee is not computed on an hourly basis, only the portion attributable to investment advice is subject to the two-percent floor.)
For existing trusts and for estates using a calendar year, the regulations (including the unbundling requirement) would not apply until tax years beginning on or after January 1, 2015. However, for certain entities—new trusts created after May 8, 2014, estates of decedents who died after May 8, 2014, and existing estates on a fiscal year—the regulations would have applied to tax years beginning on or after May 9, 2014.
The IRS was advised that the May 9, 2014 effective date did not give fiduciaries sufficient time to implement changes needed to comply with the unbundling requirement. Fiduciaries needed more time to design and implement program changes that will allow them to determine the portion of a bundled fee attributable to the two categories of costs.
In response, the IRS decided to postpone the regulations effective date so that they will apply to all trusts and estates beginning with tax years that begin on or after January 1, 2015.