Trust Updates Archive

2008 Banks Taxes IRS Supreme Court Investment Management Fee Not Always Deductible, Supreme Court Rules

Jan. 17, 2008--Chicago, IL)--Investment advisory fees paid by an estate or trust are not unique costs that are fully deductible, the U.S. Supreme Court ruled on January 16 in Knight v. Comm'r of Internal Revenue, (06-1268). Rather, those expenses are deductible only when they and all other miscellaneous expenses exceed 2 percent of adjusted gross income, Chief Justice John Roberts wrote in the Court's unanimous opinion. An exception exists, however, if the taxpayer would "not" have paid the same fee if the property was not held in a trust. The IRS in 2007 revised its regulation to spell out what trust fees meet this definition.

The implications of the Supreme Court ruling, according to tax attorneys, are (1) increased costs to taxpayers using fiduciary services and (2) increased administrative cost for fiduciaries who will need to categorize fees as unique (trustee fees) and non-unique (investment management fees).

Though the tax liability in Knight is relatively small, only $4,448, it is estimated that trusts and estates spend approximately $10 billion annually in investment management fees.

One month after the Supreme Court agreed to hear the Knight case, the Internal Revenue Service revised or clarified its regulations on the deductibility of trust expenses. The July 2007 IRS regulation took the same position that the Supreme Court did in its ruling yesterday. The IRS rule goes further in that it addresses bundled fees.

If a fiduciary charges a "bundled fee," the IRS rule says, the fiduciary must "identify the portion (if any) of the legal, accounting, investment advisory, appraisal or other" expenses that is unique. Fiduciaries may do so, according to the revised IRS rule, using "any reasonable method to allocate" the bundled fee between unique and non-unique costs.

Michael Knight, as trustee of the William L. Rudkin Testamentary Trust, paid an investment advisory fee to Warfield Associates of $22,241. The trust claimed the entire fee arguing that it was held to a higher standard, thus the investment management fees associated would not have been incurred if the property was not part of a trust. The IRS disallowed the deduction to the extent it did not meet the 2 percent floor required on miscellaneous deductions. Rudkin is a former chairman and founder of the Pepperidge Farm company.

For a copy of the court ruling go to

For more on this topic, see the upcoming issue of Trust Regulatory News.

No statement in this issue is offered as or should be
construed as legal opinion or advice

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