As a rule, statutory fees for estate planning are not tax-deductible. Estate planning is the process of distributing one's assets and property to beneficiaries at the time of death. It includes creating legal documents such as trusts and wills, as well as directives like durable powers of attorney and living wills. When tax season rolls around, many of us look for ways to reduce our tax liability.
Some attorney fees are eligible for deduction, but it depends on the type of legal service requested. For instance, hiring an attorney for a child custody dispute or a personal injury case are not deductible expenses. On the other hand, legal expenses related to a business, such as collection of unpaid debts, are eligible. In general, most estate planning services are not tax-deductible.
However, there is an exception: legal fees for estate planning can be deducted if they are related to income-generating assets. Before 2018, the IRS allowed deductions for certain estate planning charges under Schedule A rules for miscellaneous deductions. A political change in Washington could also reactivate some deductions from estate planning fees. Now more than ever, it is important to consult with a financial advisor or tax expert when starting to plan one's wealth.
It is calculated by taking total income and subtracting specific adjustments such as retirement, medical expenses, alimony and other factors from one's taxable estate. Only between 0.1% and 0.2% of estates are valued high enough to be subject to inheritance tax when a person dies. If your estate plan involves complexity or is large enough to put you at risk of paying estate taxes, then you should work with an attorney who specializes in estate planning. Those who relied on deducting estate planning fees will now have to find other ways to save by passing on their wealth. For example, if you have a living trust that generates income, the legal fees associated with maintaining and preserving your trust are tax-deductible. In addition, if you seek legal advice related to transferring your residential housing to a newly created trust as a way to avoid probate, this would qualify as a personal expense.
This means that if your estate plan includes advice on building income-generating instruments (such as a trust), the legal fees related to that service are tax-deductible. The actual percentage of your bill that is ultimately tax-deductible will vary from case to case, but it's common for 60-75% of statutory estate planning fees to be deductible. There may be what may look like “gray areas” in legal advice and what constitutes a miscellaneous deduction on your Schedule 1 Form 1040. The legal fees you pay for tax return preparation for a trust are also eligible for the deduction. If your estate plan is simple and your personal situation does not require change, then you should re-evaluate your planning documents every 3 to 5 years.
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