Bundled Fiduciary Fees — Interim Guidance Extended Pending Issuance of Regulations

Built on the foundation of the Tax Management Portfolios™, Bloomberg Tax is a comprehensive tax research solution designed by tax practitioners for tax practitioners.

By Kathleen Ford Bay, Esq.  

Richards Rodriguez & Skeith LLP, Austin, TX

Notice 2011-371 relates to the U.S. Supreme Court's decision in Knight v. Comr.,2 which held that costs paid to an investment advisor by a nongrantor trust or an estate generally are subject to the 2% floor for miscellaneous itemized deductions under §67(a), just as if an individual had incurred them. Consternation and dismay emanated from executors and trustees, especially from professional, corporate fiduciaries, for their fees are often "bundled," with a single fee representing services for management, investment, gathering of information, and making decisions based on discretion contained in the governing document. Some of these "bundled" fees are subject to the 2% floor and some are fully deductible. "Un-bundling" such fees could be rather difficult and certainly would prove time consuming and costly.

Temporary relief appeared in the form of Notice 2008-32,3 then Notice 2008-116,4 and then Notice 2010-32,5 providing in the last notice that, for tax years beginning before January 1, 2010, the fiduciaries would not be required to determine the portion of their "bundled" fees that was subject to the 2% floor. With Notice 2011-37, relief has, again, come. Now, taxpayers do not have to "un-bundle" fees for any taxable year that begins before final regulations are published in the Federal Register. Be alert, however, for further developments as Notice 2011-37 also states that "the IRS and Treasury Department expect to issue regulations under Regs. §1.67-4 consistent with the Supreme Court's holding in Knight." Given other priorities for the Treasury Department, including the issuance of Form 8939 for carryover basis reporting and a Form 706 adapted for the estates of 2010 decedents, Knight regulations may not be imminent.

This commentary also will appear in the July 2011, issue of the BNA Tax Management Estates, Gifts and Trusts Journal.  For more information, in the BNA Tax Management Portfolios, see Acker, 852 T.M., Income Taxation of Trusts and Estates,  and in Tax Practice Series, see ¶6110, Introduction — The Income Taxation System Applicable to Estates, Gifts and Trusts, and ¶6120, Estate and Trust Income Taxation — General Rules. 

1 2011-20 I.R.B. 785.

2 552 U.S. 181 (2008).

3 2008-11 I.R.B. 593.

4 2008-52 I.R.B. 1372.

5 2010-16 I.R.B. 594.

Request Bloomberg BNA Tax & Accounting