Interim Guidance Issued on Unbundling Trustee Fees

By Alistair M. Nevius, J.D.

On February 27, 2008, the IRS announced that for tax years beginning before January 1, 2008, nongrantor trusts and estates will not be required to unbundle their fiduciary fees to determine what portion is subject to the Sec. 67(a) 2% threshold for itemized deductions (Notice 2008-32).

Prop. Regs. Sec. 1.67-4 lists “unique” and “not unique” trust administrative expenses. Under the proposed regulations, only unique expenses are exempt from the 2% floor. The proposed regulations treat as unique only expenses that could not have been incurred by an individual. (The Supreme Court expressly rejected this treatment of trust expenses in Knight, S. Ct. Dkt. 06-1286 (U.S. 1/16/08).)

The proposed regulations also require that administrative fees that include both unique and nonunique expenses must be unbundled to identify the amount of each (Prop. Regs. Sec. 1.67-4(c)). Under the notice, this provision will not apply to tax years beginning before January 1, 2008.

The IRS will not issue final regulations until after May 27, 2008 (when the comment period on the proposed regulations expires), but it has said it will try to issue final regulations “without delay” after that date. The Service said in the notice that the final regulations may contain safe harbors for determining the allocation of bundled administrative expenses between costs that are subject to the 2% floor and those that are not. The notice requests comments on how such safe harbors might work.

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