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IRS Bundled Unbundled Fees 2% Miscellaneous Deductions Estates Trust Regulatory News A.M. Publishing Garbo IRS Withdraws “2%” Rule for Trusts and Estates Deductions, Seeks Comments for New Rule

(Sept. 8, 2011 --Chicago, IL) -- The I.R.S. yesterday withdrew its four-year-old proposed regulation addressing which trust and estate expenses were subject to the 2-percent floor as miscellaneous itemized deductions. The agency will be holding public hearings and is seeking public comment on a new proposed regulation. The new regulations would not take effect until 2013, at the earliest.

In May, the I.R.S. announced a continued extension of its old proposed rule. The extension allowed fiduciaries to deduct trust and estate expenses without first unbundling them. The May 2011 notice was an extension of relief the I.R.S. first granted in 2008, following the U.S. Supreme Court in Knight v Commissioner.

In Knight, the Supreme Court put to rest conflicting federal court rulings regarding whether certain fiduciary fees were fully deductible or deductible only to the extent they and all other miscellaneous expenses exceed 2 percent of adjusted gross income. However, the Supreme Court ruling did not address how do deduct these expenses if they were part of a bundled fee.

IRS final regulations were expected to require fiduciaries to "unbundle" fees, limiting what trusts and estates could deduct.

Though the agency was expected to finalize its "old" regulation this year, the I.R.S. says public feedback convinced it to withdraw the old proposed regulation and issue a new one.

The notice issued yesterday invites public comments by early December and announces a public hearing for December 19, 2011. Any final regulation when adopted will apply to taxable years beginning on or after the date that it is published in the Federal Register. This effectively means trustees of calendar-year trusts should not be required to unbundle their fees before 2013 or to reflect that unbundling earlier than the income tax returns filed in 2014.

Under the new proposed rule, fiduciaries would be required to "unbundled" fees to determine if they were subject to the 2-percent floor. However, if the "bundled" fee“ is not computed on an hourly basis, only the investment advice portion would have to be unbundled. The fiduciary could do so using "any reasonable method."

Payments made out of the bundled fee to third parties or for other services -- that would normally be subject to the 2-percent floor if they had been paid directly -- would have to be accounted for separately.

For a PDF copy of the new regulation Click Here..

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 or as an indicator of future performance.
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