Estate planning is crucial at every stage of adulthood. It organizes your affairs and plans for asset distribution posthumously. This process offers peace of mind, though it can be expensive, considering legal and accounting fees.
Are Estate Planning Fees & Expenses Deductible?
You can no longer deduct estate planning fees from taxable income. Previously, the IRS permitted itemized deductions for eligible estate planning expenses until the Tax Cuts and Jobs Act of 2017 (TCJA) altered this. These rules might be revisited in 2025, potentially reinstating tax deductions for estate planning fees, including legal fees. Currently, these fees are non-deductible, with minimal impact on most taxpayers.
Key Points:
Estate planning involves distributing property and assets after death.
It includes creating legal documents like wills, trusts, and advanced health care directives.
The IRS once considered estate planning fees tax deductible.
The 2017 Tax Cuts and Jobs Act made these fees non-deductible, affecting few taxpayers.
Estate Planning Deductions Before 2018
Before 2018's tax reform, certain estate planning fees qualified for itemized deductions under IRS rules. Simpler actions, like property or guardianship transfers, weren't deductible as personal expenses.
Under Schedule A for miscellaneous deductions, the IRS allowed deductions for estate planning fees related to:
Generating or collecting income (e.g., investment advice)
Managing, conserving, or maintaining income-producing real estate
Tax advice, preparation, and accounting by professionals
Legal expenses for drafting wills, trusts, powers of attorney, etc. For instance, if you hired a lawyer to set up an income trust, you could previously deduct related legal costs from your tax return. However, these deductions are no longer available under current rules.
Estate Planning Fees Are
No Longer Deductible
Since the Tax Cuts and Jobs Act, estate planning fees aren't deductible as miscellaneous expenses. This change, effective from 2018, is set to last until at least 2025.
A Minimal Effect on Most Taxpayers: The elimination of these deductions likely won't significantly impact most taxpayers. Previously, only expenses related to taxable income generation were deductible, exceeding 2% of the taxpayer's adjusted gross income (AGI). After surpassing this threshold, the total deductions still had to exceed the standard deduction to qualify. Given these complexities, the absence of these deductions may go unnoticed by many.
Future of Estate Planning Deductions: There's a possibility for the reinstatement of these deductions post-2025, depending on political and legislative trends. Taxpayers, in the interim, should explore alternative estate planning savings methods. Consulting a financial advisory attorney can be beneficial.
The Advantage of an Estate Planning Attorney: Navigating estate planning is complex. An estate attorney can draft legal documents, offer essential advice, and help manage the intricacies of asset allocation. They can also suggest strategies like charitable giving to optimize estate planning.