Internal Revenue Service Confirms That “Unbundling” of 2007 Unitary Fiduciary Fees Is Not Needed

February 27, 2008

The Internal Revenue Service has released Notice 2008-32, effective today, reacting to the Supreme Court’s unanimous holding in Michael J. Knight, Trustee v. Commissioner, 552 U.S. ___ (No. 06-1286, Jan. 16, 2008), that trust investment advisory fees are subject to the “2% floor” of section 67(a) of the Internal Revenue Code.

The Supreme Court’s Knight opinion left a number of questions, which Fiduciary Advisory Services has analyzed (Trusts and the 2% Floor). One of those questions is whether fiduciaries filing federal fiduciary income tax returns for 2007 will be required to “unbundle” a unitary fiduciary fee to separately state the component of the fee that is attributable to investment advice and therefore subject to the 2% floor. Regulations issued in proposed form in July 2007 would require such unbundling after those regulations are finalized.

Notice 2008-32 confirms that fiduciaries will not be required to unbundle unitary fiduciary fees in preparing 2007 income tax returns. This is welcome news.

The Notice also states that the IRS and the Treasury Department expect to issue final regulations that are “consistent with the Supreme Court’s holding in Knight,” but adds that those final regulations will not be published before April 15, 2008 (when 2007 returns are due). The Notice indicates that the final regulations may contain “safe harbors” for applying an unbundling requirement, possibly including safe harbors expressed in percentage terms, scaled with reference to the nature and value of trust or estate assets and/or the number of trust or estate beneficiaries. It remains to be seen whether any such safe harbors would be easy to craft and how much they would simplify a fiduciary’s job anyway.

McGuireWoods Fiduciary Advisory Services

McGuireWoods Fiduciary Advisory Services assists financial institutions in a wide array of areas in which questions or concerns may arise. This includes advising corporate trustees on how to avoid litigation before it arises and how to address litigation when it does arise.

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