1041 attorney fees?

[JON]

Estate, 1041 only, pays about $3,000 for probate work. The work had to do with 3M stock only in her name. Is that all a deduction on the 1041 not subject to the 2%??? What is subject to the 2% these days???

[John of PA]

Attorney Fees

Technically(sp) 1041 deductible expenses are expenses attributable to the ongoing administration of the estate vs expenses relating to the one-time probating the will and doing the 706 and inheritance tax returns. I usually deduct about 1/3 of attorney fees on the 1041 and 2/3 on the 706 if there is one. (the same administrative expenses cannot be deducted on both the 706 and 1041) I have been told there are many attorneys out there who deduct the entire fee on the 1041, however I don't feel that would hold up in an IRS audit. Not sure off the top of my head about the 2%.

[Bees Knees]

Costs subject to the 2% AGI limit on the 1041 are those that would be incurred regardless of whether the estate was in existence. Such costs include investment fees to manage a portfolio. Costs that are not subject to the 2% AGI limit are those that would not be incurred without the existence of the estate or trust, such as the attorney’s fees for administering the estate. [Section 67(e)(1)]

Most people would deduct 100% of attorneys fees on the estate, not subject to the 2% AGI limit. It would be ridiculous to claim you need an attorney to manage the estate's portfolio.

[Bees Knees]

I usually deduct about 1/3 of attorney fees on the 1041 and 2/3 on the 706 if there is one. (the same administrative expenses cannot be deducted on both the 706 and 1041) I have been told there are many attorneys out there who deduct the entire fee on the 1041, however I don't feel that would hold up in an IRS audit.

There is no code section or regulation to suggest that such costs need to be allocated between the 1041 and the 706. The instructions clearly state that if you don't claim them on the 706, then you attach a statement to the 1041 saying you didn't claim them on the 706. No excuse is required in the statement as to why you decided to put 100% on the 1041. It is simply a matter of choice, and would certainly not be questioned in an audit.

[JON]

Thank you

Bees I have always thought the 2% on the 1041 was if it would have been a Miscellaneous Itemized deduction on the decedent's return, incurred before death, but paid after. That description works sometimes, but not always....

[John of PA]

Attorney Fees

PPC's 1041 Deskbook defines deductibale 1041 legal fees as fees for the ongoing administration of the estate. If you could lead me to something in writing that states no support is need to justify 100% going to the 1041 I would love to see it. The law may be intentionaly vague here as in so many other areas.

[Bees Knees]

PPC's 1041 Deskbook defines deductibale 1041 legal fees as fees for the ongoing administration of the estate. If you could lead me to something in writing that states no support is need to justify 100% going to the 1041 I would love to see it. The law may be intentionaly vague here as in so many other areas.

Your question makes no sense. You quote a source that says deductible 1041 legal fees as fees for the ongoing administration of the estate. Then you question why I said you can put 100% of those expenses on the 1041 an nothing to the 706.

????


Whats your question?

[John of PA]

Ongoing Adm

Anotherwords, PPC is saying you can only deduct legal fees that are attributable to the ongoing administration of the estate. Preparing the inheritance taxes, gathering assets and probating the will is not ongoing administration but is a one time reporting. Ongoing administration is when an estate stays open for awhile; say managing investments, upkeep of real estate that the estate is holding, filing annual 1041's, refereing disputes among beneficiaries.. So we have here ongoing continuing estate activity vs the initial establishment of the estate. My take on this is to satify the IRS, the legal fees must be broken down between the two. Probably the many lawyers out there who deduct 100% of the legal fees on the 1041 aren't worried about it becasue they can easily produce an invoice allocating 90% of their work as ongoing administration if they had to. This is a good question and area; and I hope when QF comes out with their book on 1041's (one can only assume they will), it has a chapter on legal fees.

[Bees Knees]

Code section 67(e) says in part:

“The deductions for costs which are paid or incurred in connection with the administration of the estate or trust and which would not have been incurred if the property were not held in such trust or estate, and the deductions allowable under sections 642(b), 651, and 661, shall be treated as allowable in arriving at adjusted gross income.”

This is the rule that says these costs are not subject to the 2% AGI limit on the 1041.

The question is: What does “in connection with the administration of the estate or trust” mean?

What code section or regulation says administrating the estate does not include costs to prepare the inheritance taxes, gathering assets and probating the will? Those sound like administration expenses to me.

Code section 2053 even implies the costs associated with probating estate property are called administration expenses. The only expenses not deductible under section 2053 are those costs of taking care of property that cannot be paid for out of the estate funds. In other words, if state law says you can’t pay those costs out of funds from the estate, then they are not deductible by the estate.

So I’m not sure how you can separate any legal costs associated with an estate from the term “administration of the estate.” To me, administration of the estate is the same as saying all the ordinary and necessary costs of operating the estate are deductible, including probating estate property.

[Bees Knees]

Another point on this: Again, look at code section 67(e). It basically says ALL expenses that would not be incurred if the property were not held in the estate are deductible. Probating estate property would not be an expense if the property were not held in the estate. How can it be said, then, that these are not administration costs, fully deductible on either the 1041 or the 706?

[John of PA]

Your right, but...........

I agree with the support you just provided........... but here is a scenario where deducting too much legal fees on a 1041 can possibley get one into trouble.
In many estates, the legal fee is way more than the total 1041 income, and totally wipes out the 1041 liability. The attorney is someone who the family knew for many years (very common) or even is a relative. If the attorney fee is "excessive" the amount of the fee considered unreasonable is not deductible per letter ruling 200014004. While the letter ruling is on trustee fees, the IRS could use this LTR RUL to dissalow any fiduciary fees.
Other than the excessive fee issue, I do stand corrected that legal fees re: the one time probating of assets, which are 706 expenses, can go on the 1041 if the proper election is made. What brings any issue to this is the fact that legal fees are so excessive, and deducting them all on the 1041 can put undo risk on the return. I am not comfortable, in many cases, deducting the entire legal fee on the 1041. However, you have provided a strong support for doing so and I yield to your solid presentation of facts.