Legal fees/expenses on Estate

[Art]

1. Are attorney fees paid by an estate fully deductible on the 1041 line 14?

Estate consisted mostly of farm property in which the decedent had a partial ownership. Farm was actively operated on crop share basis, but decedent was not active in the business. The other assets consisted of small bank account and some savings. Ownership of the assets were transferred to children from the estate. From reading past posts there seems to be a disagreement on deductibility of legal fees. Deductibility allowed for preservation of income producing property vs transfer of title/ownership of personal assets. Is this the proper framework for determining deductibility? In this case fully deductible?

2. Second issue is deductibility of appraisal fees, title work and transfer on death fees. Deductible, subject to 2% of income? Fully deductible? Non-deductible?

This issue is always troublesome. I would appreciated response from those with experience on these issues.

[Burke]

An estate or trust will normally incur some expenses which would not be incurred if the property were not held in a trust or estate. These administration expenses are fully deductible by the trust or estate (not subject to the 2% AGI limitation.)

To be deductible as an administration expense, the expense must be ordinary and necessary in administering the trust or estate and be paid or incurred during the tax year. In addition the expense must be incurred for the production or collection of income; for the management, conservation or maintenance of property held for the production of income; or in connection with the determination, collections, or refund of any tax. (Sect 212).

Sample of administration expenses are:
Trustee's commissions.
Executor or fiduciary fees
Safety deposit box rental
Legal expenses
Accounting expenses
Tax preparation fees for the 1041.

Expenses subj to 2% exclusion are:
Tax preparation for decedent's final 1040.
Investment expenses
Expenses in respect of a decedent which would have been misc itemized deductions
if reported by decedent
Misc itemized deduction expenses which flow thru from entities,
Excess deductions on termination of an estate, in which a trust succeeds to the interest
of an estate

A statement of election of expense deduction on Form 1041 instead of Form 706 is required, even if no 706 is filed.

[Art]

Thanks for the reply. It does layout the framework for deductibility.

I still have some doubt about the full deductibility of the legal cost since transfer of title/ownership of the farm land was involved it would appear that the only test we could meet for deductibility would be if the expenses qualify as "management, conservation or maintenance of property held for the production of income". Maybe, I am being too cautious.

The appraisal fees, title fees, ect seem more akin to the "non-dedcutible" settlement costs that are associated with real estate sales.

Am I off base here?

[Burke]

Well, I am a little confused by your post. Did the estate incur appraisal fees? Deductible. Did the estate pay for transfer of ownership, title, etc? Deductible. Did the estate pay the attorney to draw up new deed, etc? Deductible. These are all normal expenses of the estate. These fees are also deductible (or used to adjust basis) when real estate is sold.

[Art]

Sorry if I am a bit dense on this, but I was trying to follow your previous post when you stated

"In addition the expense (administrative) must be incurred for the production or collection of income; for the management, conservation or maintenance of property held for the production of income; or in connection with the determination, collections, or refund of any tax. (Sect 212)."

I was understanding that in order to be deductible the expense must meet the above test. That was my reason for framing my concern. Your latest response seems to indicate that the apprisal fees, title fees, ect are fully deductible because they are deemed to be administrative costs paid by the estate in connection with the transfer of title to the property, whereas if these same costs were incurred outside of the estate setting (say the transaction was between individuals or corporations) the expenses may not be deductible.

To rephase, the cost are deductible simply because they are incurred in an estate setting. Whereas the same cost may not be deductible if the transaction occurred outside of an estate or trust setting. Correct?

[Burke]

Yes, that is correct. Although in the case of a real estate sale or transfer outside an estate setting, all of those fees (while not directly deductible on a tax return) are factored in when computing basis or cost of sale, so that is what I was referring to.