The attorney that set up my Trust papers gave me a receipt and said it was tax deductible. Does this type of deduction fall under the 2% limitation rule? Is there a particular place on the forms where must be entered?
Thanks
MG
The attorney that set up my Trust papers gave me a receipt and said it was tax deductible. Does this type of deduction fall under the 2% limitation rule? Is there a particular place on the forms where must be entered?
Thanks
MG
Actually your attorney is only partly right. To the extent what he did for you was tax planning, it is deductible. The portion dealing with estate planning (other than tax planning) is not.
Personal legal expenses, such as creating a will or "living" trust, are not deductible.
Here's what is deductible, according to Pub 529:
"You can usually deduct legal expenses that you incur in attempting to produce or collect taxable income or that you pay in connection with the determination, collection, or refund of any tax."
So if the creation of your trust was for the purpose of generating current taxable income, then some of the expense might be deductible, as long as it is stated separately from any other legal expenses of the trust. In that case, the expense would go on the trust income tax return, Form 1041.
-Mark Bole
I know this is true, but where do you draw the line between tax planning and estate planning? For example, if it weren't for death taxes, I would not do any estate planning, just write a will or a do it yourself trust to avoid probate. But the real estate planning I will need is due to the existence (now and then) of death taxes.
Upon reading Stu's reply, I found the following document which elaborates some of the conditions for deductibility:
The key in all cases is to accurately break out the tax-planning related costs from other personal costs. For a revocable trust ("living trust"), such expenses will end up decreasing your taxable income if you itemize on Schedule A and then only to extent the expenses exceed 2% of your AGI.
-Mark Bole
It's really not your decision to allocate how much the att'y charged for each service.
The att'y's invoice should do that.
Personally, I determine what I would have charged for planning that included no tax issues at all, compared with the cost with tax planning. It's generally between a third and a half, seems to me.
Arthur Kamlet wrote: ...
Only invoice(s) I ever got were hrsXrate=invoiced total for the overall work.
My point is but for the tax planning effort, I could do the will or simple trust myself at no cost.
Then none of it's deductible.
Trusts do a whole lot more than avoid taxes. They avoid probate, they allow for keeping control over gifts in a way that wills just can't. None of those are tax or income producing issues.
If you could get a motorcycle to get around, but decide on a car because you don't want to get rained on, is the excess cost deductible? Sorry, but no.
You have a valid point, AFAIC. Along those lines, here is an article from earlier this year by a Texas law school professor which proposes "No Deductions for Tax Planning And Controversy Costs".
"The law gives a negative tax or subsidy to tax planning and controversy work, because the costs of that work are generally deductible. But the return from the investment, in the form of less tax to be paid, is not taxed."
-Mark Bole
Either you miss my point, or I am confused by what you have said.
I KNOW that trusts do a number of things. I can create a trust to avoid probate, control assets, determine where the assets go (eventually), etc. But to the extent I wish more clever tax guidance, that is why I might hire you. That being the case, isn't all that I hire you for, i.e. more clever tax guidance, deductible?
And, I think it may have been lost in the thread earlier, but is such deductibility subject to the 2% AGI threshold?
My point was that only the tax planning part is deductible. Just because you have to pay more than you might to get the tax planning part among other features, that doesn't make the non-tax-planning part deductible.
If all you want to do is avoid what might be called the marital penalty in the estate tax, you don't need a lawyer or a trust for that. Just write your own will and leave your half of the marital estate to your kids and bypass your wife. That doesn't cost anything.
When you get a trust to do the same thing, it also has non-tax benefits that you can't get without a trust - e.g. having the spouse able to control and get income and principal from the trust. You can't deduct for the non-tax benefits even though the tax issues may be the primary ones on your mind.
According to the article Mark linked to, it is subject to the threshold. I don't do returns, so I don't have specific knowledge on this issue.
They'll have to come and get it then... :)
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