Atty vs Admin fees to Sch A

[Possi]

New client...
10 yrs old...
Won some kind of medical suit and now has an estate with Attorney as Guardian.
Interest income is around 5000.
Statement from Atty office has:
"Attorney fees" at about 3000.
"Administrative Expenses" are about 400.
My question is may I take all the 3400.00 on the Sch A to reduce her taxes by a couple hundred dollars? Where is the line drawn for Legal fees associated with the collection of taxable income? Legal fees associated with the management of the estate? I would say they are deductible, but for some reason, I'm having self-doubt.
Also, I don't see any problem with efiling this return. She can sign for herself. Objections?

Thanks!

[Edwjay]

Enrolled agent

The legal fees are deductible if they were for the "care and preservation of taxable income".as a Sched A deduction subject to the 2 % rule.

[Kram BergGold]

Estate?

I have always thought, that only decedent's had estates. You need to see if this is an account with someone as a guardian (1040) or a trust (1041).

[Possi]

trust or estate?

I don't know. I thought it was a trust, but the statement is titled "Estate of XXX" (the child).
My friend is the atty who is the guardian.
I am only doing the personal tax return, just to claim the interest. I want to be sure to claim all the legal fees allowed on the Sch A, as that is the only deduction besides State (Sales) tax paid.
So, I can take it all?
Yes?

[jainen]

You will have to figure out

You will have to figure out what the account is. $5000 interest probably is on a 1099, so who was that issued to? Until you find out what the account is you can't determine what the fees are for. They might be investment management fees, say, 1% of a $300,000 corpus. Or maybe they are non-deductible legal costs related to acquiring or protecting the corpus (which is not taxable income).

[Possi]

atty fees

You will have to figure out what the account is. $5000 interest probably is on a 1099, so who was that issued to? Until you find out what the account is you can't determine what the fees are for. They might be investment management fees, say, 1% of a $300,000 corpus. Or maybe they are non-deductible legal costs related to acquiring or protecting the corpus (which is not taxable income).

All the attorney fees are for being Legal Guardian over this young child's money. The interest is for checking, savings and "48-60 montss" maybe a CD?

This interest is her only income. The Attorney fees are for billable hours to manage all of this. The Administrative fees are service charges, bankers insurance premium for guardian bond, check printing, and reimbursements for cash disbursements.

[Snaggletoof]

Trust

Geez - why wasn't a trust created for this? Would not all of these expenses been
deductible as long as ordinary & necessary?

[Possi]

beats me

I don't know... I just want to justify the deduction. I can't decide if I asked a really stupid question or if I asked a Million dollar question.

[Snaggletooth]

Good Question

Possi - it was a good question.

My point is that in order to take a deduction on Schedule A, there are several hoops which must be jumped through. And the responses above have accurately described just how "iffy" these deductions can be - not to mention those which fall into the 2% floor.

Whereas with a trust, most such deductions can be taken outright. Of course, as a tax preparer, you probably had very little choice on how to set up the vehicle...

[OldJack]

The quote "Estate of XXX" (the child), sounds like a trust to me and I would bet that if you investigate with the attorney you will find out. You say the attorney is your friend so why not ask.

[Possi]

I'll ask tomorrow...

...right after the audit I must sit in on for another client.

[Unregistered]

A Guardianship is not generally a trust. Unfortunately the expenses relate to the protection of assets, not income.

[Possi]

Old Jack, Snag...true?

A Guardianship is not generally a trust. Unfortunately the expenses relate to the protection of assets, not income.

Is this my saddddd answer?

[jainen]

Yes, it is true

Yes, it is true. Although it has a special meaning in tax jargon, "estate" is also the correct term for the assets of any person during life. A guardian is appointed for significant assets of a minor whose parents have died or are unable to manage the account. The guardian has to get court approval for everything, so there will be substantial fees. Deduct the fees as investment expenses (subject to 2% limit), unless the property is a personal residence or otherwise used personally by the child.

[Possi]

Jainen, new info...

After talking to the Attorney, it is a Guardianship account and he is acting fiduciary.

This is the first year the account has generated enough interest to require a tax return to be filed for the child. The 1099INT was issued in the Taxpayer's SS number, not an estate or trust number.

Distributions from the account have been tax free, only the interest is taxable.

So, what's the million dollar answer? I believe you said on Oct 1 posting that if the account is tax free, the Legal fees are not deductible. What happens when the account generates taxable income? Are they deductible now?

Lordy, I'm learning this week....