Certain Expenses of a Trust May Not Be Deductible In Full Anymore

Trusts don’t always fare well when Congress changes the income tax laws. With the passage of the One Big Beautiful Bill Act (OBBBA),^[1] certain expenses that were previously deductible in full by trusts, may no longer be deductible in full.

First, a little history. Back in 2017, the Tax Cuts and Jobs Act (TCJA),^[2] while lowering taxes for most, raised them for a few. One group of those few taxpayers for whom taxes went up under TCJA were certain trusts and estates (generally those with large investment advisory fees or certain kinds of other expenses).

The issue for these trusts is that the TCJA cut out miscellaneous itemized deductions for everyone, but trusts have no standard deduction to fall back on like individual taxpayers do. Lower deductions, and no ability to replicate (i.e., deduct) whatever was previously a miscellaneous itemized deduction (because they were disallowed) generally meant higher taxable income, and the tax brackets and rates applicable to trusts (while slightly trimmed under the TCJA) were not on the whole largely different than the pre-TCJA tax brackets and rates were. Not all was lost, however. The IRS finalized regulations^[3] providing guidance on which expenses a trust could still deduct, and importantly, for those trusts that pay for professionals to advise trustees or beneficiaries, when those advisory fees were still deductible in full.

 Let’s quickly review the basic rules that remain in effect as a result of these regulations, before any impact from OBBBA. Most advisory, tax preparation, and similar fees are categorized as miscellaneous itemized deductions. Pre-TCJA, these fees were deductible by individuals to the extent they exceeded 2% of adjusted gross income. Trusts have this same general rule, but get a special break in the case of costs which are paid or incurred in connection with the administration of the trust, and which would not have been incurred if the trust property was instead held by an individual.

There kinds of costs (even pre-TCJA, when miscellaneous itemized deductions and the 2%-of-AGI deductibility threshold were things) were normally deductible in full from the first dollar. So, when is a cost in the first category (non-deductible for individuals under TCJA and OBBBA, and thus non-deductible for trusts as well), and when is a cost in the second category (still deductible, though likely not fully anymore for trusts, because of OBBBA)?

Under the final regulations, the following are considered costs in the first category:

• Costs where the existence and nature of the cost would still be incurred if an individual were holding the same property. The regulations give as an example the cost incurred in defense of a claim against the estate of a decedent, where such claim is unrelated to the existence, validity, or administration of the decedent’s trust.

• Ownership costs such as condominium fees, insurance premiums, maintenance and lawn services, and automobile registration and insurance costs. The regulations also give as an example any costs that are passed through to the trust (such as where the trust is a partner in a partnership), where such costs would be defined as miscellaneous itemized deductions if passed through to an individual.

• Fees for investment advice, including fees for any related services that would be provided to an individual investor, where those fees are those that would be commonly or customarily incurred by an individual investor.

The following are costs that are considered to fall into the second category:

• Tax preparation fees: Costs relating to all estate and generation-skipping transfer tax returns, fiduciary income tax returns, and the decedent’s final individual income tax return (probably because individuals can never prepare their own final individual income tax returns). The costs of preparing all other tax returns (for example, gift tax returns) are excepted out and placed back into the first category.

• There is a special exception for “certain incremental costs of investment advice beyond the amount that would normally be charged to an individual investor.” An incremental cost is defined as “a special, additional charge that is added solely because the investment advice is rendered to a trust or estate rather than to an individual, or attributable to an unusual investment objective or the need for a specialized balancing of the interests of various parties (beyond the usual balancing of the varying interests of current beneficiaries and remaindermen) such that a reasonable comparison with individual investors would be improper.”

• Appraisal fees to determine the fair market value of assets as of the decedent’s date of death, to determine value for the purposes of making distributions from the trust, or as otherwise required to properly prepare the trust’s tax returns. Appraisals for insurance purposes are excepted out and placed back in the first category.

• Certain fiduciary expenses not commonly incurred by individuals, such as probate court fees and costs, fiduciary bond premiums, legal publication costs of notices to creditors or heirs, the cost of certified copies of the decedent’s death certificate, and costs related to fiduciary accounts.

Thus, trustees need to make sure that they keep careful records when paying the trust’s expenses, and include enough information regarding what an expense was paid for. That way, the trust’s tax professionals can determine which category the expense falls into. Advisors to trustees and/or beneficiaries (whether CPAs, attorneys, or other professionals) should be sure to alert the trustee (or beneficiaries) when their fees are or are not deductible to the trust under these rules. Lastly, investment advisors who render special advice to trustees regarding investments should take care to separately invoice such amounts, as such amounts may be deductible, at least in part, by the trust.

So, what did OBBBA do to the still-complete deductibility of certain trust expenses? Well, OBBBA introduced a replacement for the old Pease limitation, which “cuts back” the tax benefit of all itemized deductions, for certain taxpayers, by approximately 5.4%. Certain commentators thus refer to this new Pease-esque limitation on itemized deductions as “the Cutback.”^[4]

The old Pease limitation statutory language excepted trusts and estates from its effect, but the Cutback does not explicitly except them. The Cutback, by its terms, is meant to apply to any individual, the dollar amount of whose taxable income is above the beginning of the applicable 37% bracket for that individual.^[5] Section 641(b) of the Internal Revenue Code has long said that trusts and estates compute their taxable income “in the same manner as an individual, except as otherwise provided [in Subchapter J].”

But there’s a problem with the interplay of Code §641 and the new Cutback. Trusts hit their applicable 37% bracket at only $16,000 of taxable income (in 2026). So, trusts, unlike individuals in the highest tax bracket, come under the Cutback’s terms at a much-reduced amount of taxable income, relative to when an individual taxpayer faces the application of the Cutback.^[6]

The Senate Finance Committee’s report (July 31, 2025) on Code § 68 (the re-written section imposing the Cutback) states the Cutback is applicable to “individuals, estates, and trusts.” Thus, from a bare reading of the new law, it at least appears that trusts will no longer be able to deduct in full even those special expenses that the regulations say are still deductible in full^[7]—where the trust has $16,000, or more, of taxable income.^[8]

It is very possible that Congress or the IRS will act to produce further authority with regard to this situation, either via new or amended regulations, or ideally, a technical correction act to clarify Congress’s intent. Until that authority comes, however, it’s an open question as to whether or not a trust will be able to deduct in full those certain special expenses discussed above. And, at least from a bare reading of the OBBBA, without any further guidance, it certainly appears to be the case that they will not be able to do so.

For more information about how these changes could effect your existing trust, please contact one of our experienced Trust attorneys. 

^[1] Public Law 119-21, with the formal name of: An Act to provide for reconciliation pursuant to title II of H. Con. Res. 14.

^[2] Public Law 115-97, with the formal name of: An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018.

^[3] Treasury Decision 9918, issued on October 19, 2020, revising, inter alia, Treas. Reg. § 1.67-4.

^[4] Steve R. Akers and Kerri G. Nipp, LOOKING AHEAD – Estate Planning in 2025, Current Developments and Hot Topics. October 2025.

^[5] The Cutback also applies to that individual if that individual would have had taxable income above the beginning of the applicable 37% bracket threshold for that individual, but for the itemized deductions to which the Cutback applies and reduces by approximately 5.4%.

^[6] And, certainly relative to the old Pease limitation, since it excepted trusts and estates entirely.

^[7] Which expenses are expressly defined in the regulations as not being miscellaneous itemized deductions, post-TCJA and its disallowance of all miscellaneous itemized deductions.

^[8] Or would have had that much in taxable income, but for the application of the Cutback to the trust’s itemized deduction amounts.