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Deductibility of Legal Fees Paid for Estate Planning

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It is commonplace for individuals to seek the services of legal counsel with estate planning, tax planning, business planning and, increasingly, long term care planning issues. Often the question is asked whether the legal fees and costs paid an attorney are tax deductible.  IRC 262 throws cold water on the deductibility of expenses that are classified as personal expenses, unless explicitly allowed by a specific statutory provision. Several provisions of the code do allow the deduction of expenses incurred in earning a living or in profit-oriented activities.  For example IRC §§162 (Trade or Business Expenses), §168 (Accelerated Cost Recovery System) or §212 (expenses for production of income) all allow for deductions.   This would mean that fees relating to estate planning may be deductible when incurred for:  (1) the production or collection of income; (2) the management, conservation or maintenance of property held for the production of income; or (3) tax advice and tax planning.  These three types of expenses qualify as miscellaneous itemized deductions and are subject to a floor of 2% of your adjusted gross income (AGI).[1]  As the IRS provides guidance in Publication 529, Legal Fees for production of income and job related legal fees is deductible while personal legal expenses, including legal expenses to prepare a Will are not deductible.[2]

The key to gaining deductibility will be to show that without the expense there would be a business loss, or there would be loss of employment.  For example in Duquette v. Comm., T.C. Memo 2001-3, Docket No. 1933-98, January 8, 2001, the court found payment of attorney fees to defend criminal charges against a key employee to be non-deductible for the following reason:   “while the incarceration of Mr. Hood might have caused * * * [the corporation] to cease operations, petitioners have not shown that * * * [the corporations’] failure to pay the legal fees would have led to Mr. Hood’s incarceration.” quoting Hood v. Commissioner, 115 T.C. 172, 181-82 (2000).  In other cases the Tax Court has opined that “the origin and character of the claim with respect to which an expense was incurred, rather than its potential consequences upon the fortunes of the taxpayer, is the controlling basic test of whether the expense was ‘business’ or ‘personal'”); Boagni v. Commissioner, 59 T.C. 708, 712- 13 (1973).  Under this rational, if the legal fees are incurred to assist the taxpayer arrange his tax affairs, business affairs, preserve or promote employment then the payment may be a deductible legal expense.

Are legal fees deductible?

With the above as background it might be reasoned that though attorney’s fees for drafting estate planning documents represent a personal nondeductible expense, aspects related tax planning should be deductible.  Tax planning aspects would include estate tax planning, preservation of step up in basis, generation-skipping transfer tax exemption and the tax apportionment planning, among other tax planning aspects.  Accordingly, the attorney’s fee portion attributable to tax advice and tax planning may be deductible subject to the 2% floor, as would be other professional advisory fees related to tax advice and planning.  Similarly, services related to business planning would also be deductible expenses.  Generally, these services involve document preparation such as articles of incorporation, partnership agreements, buy-sell agreements, corporate restructuring documents, employee benefit plan agreements and executive compensation agreements or deferred compensation plans.  Fees for these professional services should be charged directly to the business enterprise, which may then deduct (or amortize) them as an ordinary and necessary business expense.

Some practitioners also have opined that attorney’s fees attributable to drafting a revocable living trust may be deductible as an expense a taxpayer incurs for the management, conservation or maintenance of income producing property.  If the taxpayer funds a living trust with income-producing property, he may assert that the trust is an arrangement to provide for asset management if the taxpayer become incapacitated or to minimize probate fees.  As discussed in Hood above, the argument to win the deduction will have to be that the failure to incur the costs would lead to mismanagement of the assets or would lead to the estate having to deal with probate costs.  As can be surmised, the arguments are circular and difficult to grasp for which reason the result may not be locked in place.

An emerging fact pattern is individual clients seeking to find a way to cope with deductible but unaffordable medical costs by way of long term care costs.  In that context, if a taxpayer seeks the services of an attorney to preserve assets from long term care costs by qualifying for means tested public benefits or to access benefits from a long term care insurance policy, it may well be a deductible medical expense under IRC §213 and IRC §7702B(c).  Under the Hood rationale, a showing could be made that without the expense being incurred deductible medical costs would have been mismanaged.  Though there is no direct authority this author has been able to find for this proposition, there seems to be an analogous authority by way of acceptance of the proposition that fees and costs paid for tax planning are deductible expenses.

If a taxpayer wishes to claim a tax deduction for legal fees, it would be a good practice for the taxpayer to request an itemization of your fee statement and the specific portion of the fee attributable to personal matters, tax advice and planning, medical expense planning and advice.  Assuming this allocation is reasonable, you may deduct the fees for nonpersonal matters as long as the deduction amount exceeds the 2% floor.

Tax deductibility of legal expenses in the estate planning context is not very clear and fraught with danger.  Care should be taken before claiming the deduction.

[1] Martin L. Pierce, Wills and Trusts – When are Fees Deductible?, 2003,

[2] IRS Publication 529, Miscellaneous Deductions, Pages 5, 10, 14 and 15, 2009.

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