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Estate plans and the 2 percent floor

Recently the Internal Revenue Service issued their final regulations under the Internal Revenue Code Section 67 dealing with application of the two percent floor to the miscellaneous itemized deductions for estates and non-grantor trusts and estates. In order to remain compliant with the new rules, below are some things New Jersey consumers should know.

In most cases, miscellaneous itemized deductions are permitted only when the aggregate of all of the deductions for any taxable year exceeds two percent of adjusted gross income. This rule is applicable to non-grantor trusts and estates with this major modification -- the costs paid out or incurred in connection with a trust or estate administration "which would not have been incurred if the property were not held in such trust or estate" are allowed as deductibles with no regard to the two percent floor.

Non-grantor trusts and estates can deduct specific miscellaneous itemized deductions only if they exceed two percent of the AGI. When expenses are subject to this two percent floor, the deduction's benefit will be drastically reduced or entirely eliminated. This will result in a higher income tax bill, so determining which expenses are affected by the two percent floor becomes critically important.

The nature of the expense is the determining factor in applying the two percent floor rule. Trustee fees are fully deductible, because by definition, these fees are only incurred when assets are being held in trust. Investment advisory fees and other kinds of fiduciary expenses may fall under the two percent floor.

In its decision, the court emphasized that some investment advisory fees that a trust incurs might be fully deductible if "an investment advisor were to impose a special, additional charge applicable only to its fiduciary accounts." Additionally, the court determined that it's within the realm of possibility that some trusts have unusual investment objectives or might require that the interests be specially balanced among various parties. This is beyond the scope of the normal balance of incomes and the remainder of beneficiaries' interests. In cases such as those, the incremental cost of specialized investment advice would not be subjected to the two percent floor.

As this can be a complex matter, it may be necessary to seek the services of a professional who deals with estate planning.

Source: Wealth Management, "Deductibility of Trust and Estate Expenses" Kristin Abati and Renat Lumpau, Jul. 24, 2014

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