How to Deduct Fiduciary Fees for an Estate or Trust
When preparing an estate or trust’s income tax Form 1041, you may deduct fiduciary fees. Fiduciary fees are the amounts executors, administrators, or trustees charge for their services. If you’ve figured out that the amount of work involved in administering a trust or estate is so much that you really need to be paid, this point is where you deduct your fee for services.
Fiduciary fees are generally fully deductible. But if some portion of the income for the estate or trust comes from municipal bonds or other tax-exempt vehicles (tax-exempt money market funds, for example), you’re required to allocate fiduciary fees between taxable and tax-exempt income, and you get to deduct only the amount allocable to taxable income.
To calculate the allocation:
Subtotal the income shown on lines 1 through 8 of Form 1041 and add the tax-exempt income from line 1 in “Other Information” on the back of the return to arrive at total income.
Divide the total income by the total taxable income and multiply the results by the total fiduciary fees.
Take the deductible fees on line 12 and subtract the balance from the total tax-exempt income to arrive at the adjusted tax-exempt income.
Place that number on Schedule B, line 2.
For estates, base the executor’s fee you charge on the number of hours you actually work on estate matters. Set a rate that you feel your time is worth, and keep careful track of your time. For trusts, if you’re making the investment decisions, obtain a fee schedule from a trust company, which charges its trust clients a percentage of the market value of the assets it holds, plus a percentage of income collected, as its fee.
Your fee shouldn’t exceed that of a bank or trust company, and it probably will be less, because your overhead is much less. If you’re paying an outside advisor for investment advice, you’ll most likely want to subtract his or her fee from the one the bank or trust company charges; after all, investment advice is already included in the fee he or she charges.