For most people, estate planning fees are not tax deductible. Legal fees paid to create or update a will, trust, or power of attorney are considered personal, non-deductible expenses. However, the rules are slightly different after someone has died. Some estate administration and tax-related expenses can qualify for different tax treatment in some cases.
When Might Estate or Trust Legal Fees Be Deductible?
Depending on the circumstances, certain expenses incurred after death may be deductible by an estate or non-grantor trust. The rules differ depending on whether the deduction is claimed for estate or trust income-tax purposes or for federal estate-tax purposes. Under Internal Revenue Code section 67(e), certain administration expenses of an estate or non-grantor trust may be deductible for income-tax purposes when they would not have been incurred if the property were not held by the estate or trust.
- Estate administration after death – certain attorney, fiduciary, appraisal, and other administration expenses may be deductible for estate income-tax purposes or, under separate rules, for federal estate-tax purposes; the same expense generally cannot be deducted for both purposes
- Non-grantor trust expenses – certain trustee, legal, and administration costs may qualify when they are attributable to administration of the trust and would not ordinarily have been incurred by an individual owner
- Business-related legal fees – legal fees attributable to a trade or business may be subject to separate tax rules, and deductibility depends on the nature and purpose of the expense
The rules can be complicated, and the deductibility of a particular expense depends on the individual circumstances. It is important to consult both an estate planning attorney and a qualified tax professional when determining whether a particular legal expense is deductible.
What Estate Planning Costs are Usually Not Deductible?
Fees for purely personal estate planning services are generally not deductible. This can include attorney fees for:
- Preparing or updating a will
- Creating a revocable living trust
- Preparing powers of attorney
- Establishing healthcare directives
- General estate planning consultations
Can an Estate Planning Attorney Help with Tax Planning?
While estate planning fees might not be tax deductible, estate planning and tax planning often overlap. For individuals with substantial assets, business interests, trusts, or complex family circumstances, working with an estate planning attorney is especially important.
An estate planning attorney can help structure an estate plan with potential tax consequences in mind. Generally speaking, a well-structured estate plan will consider estate taxes, income taxes, gifts taxes, and the transfer of assets to beneficiaries.
Here are several ways an estate planning attorney can help:
- Identify potential estate tax exposure – review the value and nature of your assets and explain whether federal or state estate taxes could affect your estate
- Structure trusts strategically – manage how and when assets are transferred to certain trusts to reduce potential estate tax exposure
- Plan lifetime gifts – explain the legal structure and potential tax consequences of giving assets to family members or other beneficiaries during your lifetime
- Coordinate business succession planning – structure a succession plan that addresses ownership transfers, valuation, and potential tax considerations
- Plan for charitable giving – address charitable trusts and other giving strategies that may provide potential tax benefits while supporting organizations you care about
- Consider how assets are titled and transferred – outline the different legal and tax consequences of beneficiary designations, joint ownership, trusts, and other methods of transferring property
It’s important to remember, an estate planning attorney is not your tax advisor. Tax laws are complex and change over time. Your estate planning attorney can coordinate with CPAs, tax attorneys, and your financial advisors. This coordination ensures the legal plan and tax strategy work together.
Get Help From Estate Planning Professionals
The bottom line is that good estate planning requires careful thought about a variety of issues, including potential tax consequences. At Lonich Patton Ehrlich Policastri, we find many clients are unaware of the negative effect taxes can have on their beneficiaries. We have years of experience helping our clients maximize their position regarding potential taxes. Whether through trusts, charitable giving, gifts, or business succession planning, we help you find the solution that’s best for you. Schedule a free, no-obligation consultation to discuss your situation.
FAQs
Q: Are estate planning attorney fees tax deductible?
A: Generally, no. Attorney fees for personal estate planning services, such as preparing a will, revocable living trust, power of attorney, or healthcare directive, are typically considered personal expenses and are not tax deductible. However, certain legal fees incurred by an estate after death or expenses related to a non-grantor trust may receive different tax treatment.
Q: Can an estate deduct legal fees after someone dies?
A: In some circumstances, yes. Certain legal and administration expenses incurred after death may be deductible for estate income-tax purposes or, under separate rules, for federal estate-tax purposes. Potentially deductible expenses can include certain attorney fees, fiduciary fees, and appraisal costs. The same expense generally cannot be deducted for both income-tax and estate-tax purposes, and the specific treatment depends on the nature of the expense and applicable tax rules.
Q: How can an estate planning attorney help with tax planning?
A: An estate planning attorney can structure an estate plan with potential tax consequences in mind. This may include evaluating trusts, lifetime gifts, charitable giving, business succession plans, and how assets are titled or transferred. An attorney can also coordinate with your CPA, tax attorney, and financial advisor to help ensure your estate plan and overall tax strategy work together.
Q: Should I talk to an estate planning attorney or a tax professional about deducting estate planning fees?
A: For questions about whether a specific legal expense is tax deductible, it is generally best to consult both an estate planning attorney and a qualified tax professional. An estate planning attorney can explain the legal and estate-planning implications of the expense. A tax professional can evaluate its treatment under current tax law. Because tax rules can change, professional advice should be based on your specific circumstances.
Disclaimer: this article does not constitute a guarantee, warranty, or prediction regarding the outcome of your legal matter.
