Trustees Relieved of “Unbundling” Until Final Regulations are Published

April 14, 2011

Trustees are relieved of “unbundling,” according to IRS Notice 2011-37 that extends its no-unbundling-of-unitary-fees pronouncements to fiduciary income tax returns for all taxable years beginning before final regulations on this subject are published. The Notice was released on April 13, 2011.

Previously, the IRS released Notices 2008-32, 2008-116 and 2010-32, reacting to the Supreme Court’s unanimous holding in Michael J. Knight, Trustee v. Commissioner, 552 U.S. 181 (2008), that trust investment advisory fees are subject to the “2% floor” of section 67(a) of the Internal Revenue Code. Those Notices confirmed that fiduciaries preparing 2007, 2008 and 2009 income tax returns would not be required to “unbundle” a unitary fiduciary fee to separately state the components of the fee that are subject to the 2% floor. See “Trustees Relieved of ‘Unbundling’ for 2009 Returns” and our Trusts and the 2% Floor analysis on section 67(e) and the Knight decision.

Notice 2011-37 again extends the relief of trustees from the need to unbundle their fees. As a departure from the practice of past years, however, Notice 2011-37 does not provide just one more annual extension, that is, for 2010 returns. This time, the extension applies to all “taxable years that begin before the date that the final regulations are published.” In effect, this is at least a two-year extension, because it applies not just to returns for 2010, but also to returns for 2011, which has already begun without final regulations. Put another way, under Notice 2011-37, when final regulations are issued, any “unbundling” requirement will not be applied retroactively to any year that has already begun.

Trustees may therefore deduct the full amount of the bundled fiduciary fees for 2010 and 2011 without regard to the 2% floor, but payments by trustees to third parties for expenses subject to the 2% floor are readily identifiable and must be treated separately from the otherwise bundled fiduciary fees.

It is likely that final regulations on the application of the 2% floor to trusts were near completion before the end of 2009, when the inability of Congress to stabilize the estate tax law for 2010 created a distraction for those in the government who write tax guidance as well as for fiduciaries, clients, and estate planners who must follow that guidance. The distraction was only compounded by the sweeping, but temporary, tax legislation enacted in December 2010. Now the IRS has issued a once-and-for-all Notice that will provide certainty on “unbundling” until the final regulations are published, no matter how long that takes.

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