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Final IRS Sect. 67(e) Regs for Estate and Trust Taxpayers:Applying the Required 2% Deduction FloorWEDNESDAY, OCTOBER 15, 2014, 1:00-2:50 pm EasternIMPORTANT INFORMATIONThis program is approved for 2 CPE credit hours. To earn credit you must: Participate in the program on your own computer connection and phone line (no sharing) – if you need to registeradditional people, please call customer service at 1-800-926-7926 x10 (or 404-881-1141 x10). Strafford accepts AmericanExpress, Visa, MasterCard, Discover. Respond to verification codes presented throughout the seminar. If you have not printed out the “Official Record ofAttendance”, please print it now. (see “Handouts” tab in “Conference Materials” box on left-hand side of your computerscreen). To earn Continuing Education credits, you must write down the verification codes in the corresponding spaces foundon the Official Record of Attendance form. Complete and submit the “Official Record of Attendance for Continuing Education Credits,” which is available on theprogram page along with the presentation materials. Instructions on how to return it are included on the form. To earn full credit, you must remain on the line for the entire program.WHOM TO CONTACTFor Additional Registrations:-Call Strafford Customer Service 1-800-926-7926 x10 (or 404-881-1141 x10)For Assistance During the Program:- On the web, use the chat box at the bottom left of the screen- On the phone, press *0 (“star” zero)If you get disconnected during the program, you can simply call or log in using your original instructions and PIN.

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Final IRS Sect. 67(e) Regs for Estateand Trust TaxpayersOct. 15, 2014Tina D. MilliganDomingo P. Such, IIIHarrismyCFOPerkins .com

NoticeANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BYTHE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANYOTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THATMAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING ORRECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.You (and your employees, representatives, or agents) may disclose to any and all persons,without limitation, the tax treatment or tax structure, or both, of any transactiondescribed in the associated materials we provide to you, including, but not limited to,any tax opinions, memoranda, or other tax analyses contained in those materials.The information contained herein is of a general nature and based on authorities that aresubject to change. Applicability of the information to specific situations should bedetermined through consultation with your tax adviser.5

Final IRS Sect. 67(e) Regs for Estate andTrust Taxpayers: Applying the Required 2%Deduction FloorDomingo P. Such III, PartnerPerkins Coie, ChicagoTina D. Milligan, Managing DirectorCTC myCFOOctober 15, 2014

AGENDA7

Agenda Background: Court cases and Regulations prior to finalized I.R.C. Section67(e) Regulations Details on final Regulations Practical examples and strategies8

BACKGROUND9

Evolution of the deductibility of investment advisoryexpenses Section 23(a) of the Internal Revenue Code Act of 1928–Predecessor to I.R.C. Section 162 – Trade or business expenses–Allowed deductions for both taxpayer’s trade or business and other profit-oriented expenses Higgins v. Commissioner, 312 U.S. 212 (1941)–Ruled in favor of the IRS–Taxpayer not entitled to deduction for expenses incurred in a profit-oriented activity unless partof a trade or business–IRS revoked all prior guidance and authority permitting deduction for non-business, profitoriented expenses Section 23(a)(2) of the Internal Revenue Code (1942)–predecessor to I.R.C. Section 212 – Expenses for production of income10

Overview of I.R.C. Section 212 I.R.C. Section 212–Deduction for all ordinary and necessary expenses paid or incurred during the taxable year: For the production or collection of income; For the management, conservation, or maintenance of property held for the production ofincome; or In connection with the determination, collection or refund of any tax–Deductions are not included on the I.R.C. Section 67(b) list of non-miscellaneous deductions–Generally permits deductions for expenses, such as fiduciary fees, incurred in connection withthe administration of an estate or trust.–Classifies trust or estate administration expenses, if not allowed in computing AGI under I.R.C.Sections 62(a) or 67(c), as miscellaneous itemized deductions subject to the 2% of AGI floor11

Overview of I.R.C. Section 67 Section 67(a)–Taxpayer’s “miscellaneous itemized deductions” may be deducted only to the extent suchexpenses exceed 2% of the taxpayer’s AGI–“2% floor”–Trusts and estate are subject to the same limitation Section 67(b) defines “miscellaneous itemized deductions” as:–Not described in one of twelve categories of deductions listed in I.R.C. Subsections 67(b)(1)(12)–A deduction not allowed in computing AGI, other than a personal exemption–Interest expenses under I.R.C. Section 163 are not miscellaneous itemized deductions–Certain taxes under I.R.C. Section164 are not miscellaneous itemized deductions12

Overview of I.R.C. Section 67 Section 67(e) will not apply to expenses paid or incurred in connection withadministration of an estate or trust if would not have been incurred if theproperty were not held in such estate or trust.13

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Overview of I.R.C. Section 68 Section 68–Reduces a taxpayer’s itemized deductions by an amount equal to the lesser of : 3% multiplied by the excess of AGI over the applicable amount, or 80% of the total itemized deduction otherwise allowable for such taxable year15

Overview of I.R.C. Section 56 Section 56–No deduction is allowed for Section 212 expenses for purposes of AMT–Any amount deducted from AGI for miscellaneous itemized deductions will be “added back”into taxpayer’s AGI to compute AMT16

Definition of AGI for a trust Section 67(e) definition of AGI for a trustGross income: All income from whatever source derivedLess: Deductions Deductions taken directly against gross income - “above the line”– Deductions that would be allowed in computing an individual’s AGI under section62(a),» such as deductions attributable to a trade or business, or» to property held in the production of rents or royalties;– Deductions for distributions to beneficiaries under sections I.R.C. Sections 651 or661;– Personal exemptions under I.R.C. 642(b); and– Deductions “for costs which are paid or incurred in connection with theadministration of an estate or trust and which would not have been incurred if theproperty were not held in such trust or estate.” Adjusted Gross Income 17

Taxable income Tax is imposed on “taxable income” of both individuals and trusts1Gross income: All income from whatever source derivedLess: Deductions Deductions taken directly against gross income - “above the line” Adjusted Gross Income Deductions taken from AGI - “below the line” (i.e. Investment advisory fees) Taxable Income18

Court cases Split between Sixth Circuit and Fourth/Federal Circuit rulings Knight v. Commissioner U.S. Supreme Court Decision–Knight V. Commissioner, 522 U.S. 181 (2008)–Criticized the Treasury’s interpretation of exception in Proposed Regulations–Proposed Regulations limit the Section 67(e) exception to costs which were “unique” to a trustor estate costs that could not be incurred by an individual–The court held Treasury’s interpretation too narrow Trust and estate expenses should not be subject to the 2% floor– if not “customarily or commonly incurred” by an individual Even investment advisory fees could fall within the category of expenses not “customarilyor commonly” incurred by individuals19

Treasury guidance and Proposed Regulations Temporary guidance leading up to final Regulations–Treasury responded to the Knight decision–Notice 2008-32–Proposed Regulations in 2011 Left lack of clarity–Confusion over investment advisory fees20

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FINAL REGULATIONS22

The final 67(e) regulations 2% floor applies if they are costs “commonly or customarily” incurred by ahypothetical individual holding the same property23

The final 67(e) regulations Fiduciary expenses that will be subject to the 2% floor–Ownership costs–Tax preparation fees other than those incurred for: estate tax returns Generation skipping transfer tax returns Fiduciary income tax returns Decedents’ final income tax returns–Investment advisory fees (subject to a limited exception)–Appraisal fees, except those required: in preparation of the trust’s transfer tax returns, or income tax returns, or needed to measure distributions (i.e. annual unitrust amount)24

The final 67(e) regulations Fiduciary expenses that will not be subject to the 2% floor–Not “commonly or customarily” incurred by individuals Probate court fees Fiduciary bond premiums Fees for publishing notices legally required in the administration of a decedent’s estate Costs of certified copies of a death certificate Costs of preparing fiduciary accountings25

The final 67(e) regulations Investment advisory fees – not “commonly or customarily” incurred byindividuals–Additional charges for the implementation of an unusual investment objective: required by the terms of the estate or trust, or resulting from the need to balance interests of the beneficiaries–Incremental cost of these services should not be subject to the 2% floor–Final Regulations state that this portion of investment advisory fees is limited to the amount inexcess of those normally charged to individual investors26

The final 67(e) regulations Bundled fees–Fiduciaries charging a single fee for mixed services where a portion would be exempt from 2%floor must “unbundle” fees–Reasonable method for allocation Allocate and separately state the portion subject to 2% floor versus exempt If not calculated on an hourly basis: only the portion reasonably allocated to investmentadvice must be subjected to 2% floor Only general guidance on reasonable method27

The final 67(e) regulations Effective date–Existing estates with fiscal years ending December through April, calendar year No earlier than January 1, 2015–Estates of decedents dying on or after May 9, 2014 May 9, 2014–Trusts created on or after May 9, 2014 May 9, 2014–Trusts with fiscal year end during months of May through November May 9, 2014 (accelerated)28

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PRACTICAL EXAMPLES ANDSTRATEGIES30