Distributable Net Income
The IRS has recently instituted proposed regulations under code section 67(e). 1.67-4 discusses that a 2% floor on miscellaneous itemized deductions. This audio clip applies this regulation to trusts.
The model of how a trust is taxed for income tax purposes is to treat the trust like it is a normal individual. There are exceptions to this rule such as DNI (distributed net income), but basically trusts are taxed like an individual. Under code-67, this 2% floor applies to deductions. The problem is that if you are a trustee, you have significant fiduciary responsibilities and you will do things that if it were your own money you wouldn’t do in order to comply with the prudent investor act. Be methodical; hire an investment manager and pay a fee to invest the money, or at least a financial planner who can give a written investment policy and a report to show that you have made efforts to follow the prudent investor act. This incurs more costs, which is a large part of the deduction. For every trust you do work on, if you actually want to build that trust, you may have to give separate bills describing what is subject to the 2% floor and what isn’t. Can your client trust deduct your fees or do they first have to deduct from them the 2% AGI (average gross income). This applies to investment, financial, and estate planners, accountants, etc. According to the regulation, to the extent that a trust incurs a cost that is unique to such entity that cost is not subject to the 2% floor. The cost is unique to a trust if an individual could not have incurred that fee with property not involved with the trust. There is also a list of non-exclusive things that are not unique to a trust (are subject to 2% floor), such as advice on investing for total returns, gift tax returns, defense of claims by creditors of the deceased or grantor, bundled fees.
The taxpayer must use any reasonable method to allocate these bundled fees. In general in taxes when you show something that appears as though you spent time on it, it works in your favor. But they don’t explain what reasonable is.