Tax Deductions for Financial Advisor Fees
The Tax Cuts and Jobs Act of 2017, commonly referred to as TCJA, eliminated the deductibility of financial advisor fees from 2018 through 2025.
And while advisors and clients have had a few years to get used to the change, they may be eyeing it with renewed interest after the long bull market that's persisted even through the coronavirus pandemic.
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Trusts and Business Accounts Retain Some Deductibility
While an individual cannot take miscellaneous itemized deductions like those on IRC 212, trusts still can to a degree.
The tax code has a special rule that allows trusts to deduct these expenses in full, provided the expense is unique to the trust and would not be commonly or customarily incurred by an individual, says Sean Weissbart, a partner at Blank Rome and an adjunct professor of law at New York University School of Law.
If an advisor provides specialized advice to the trust that goes above and beyond what is traditionally provided to individuals, this extra portion may be deductible to the trust, he says.
"For example, if a trustee can articulate an unusual investment objective or specialized need to balance certain interests of the parties, it may be possible to deduct this excess expense even before the current law expires," he says. However, the regulations are clear that the balancing must be for services "beyond the usual balancing of the varying interests of current beneficiaries and remaindermen," to the point that it wouldn't make sense to compare these to the needs of an individual investor.
In such cases, if you'd charge a $10 fee to an individual but charge the trust $15, the trust can deduct the $5 difference, Martin says.
To do this, you must ensure the trust is considered a nongrantor trust, meaning it's treated as a separate tax-paying entity, Weissbart says. With grantor trusts, the creator of the trust is responsible for paying taxes on the trust's annual income and the special rule would no longer apply.
"It is possible for a trust that is currently classified as a grantor trust to be reclassified as a nongrantor trust by eliminating the powers in the trust document that caused the initial grantor trust classification," he says.
Then, as with an IRA, carefully divide your fee and identify the portion that is above what would be charged to an individual.
"Fiduciaries taking these positions should keep meticulous records in case it becomes necessary to justify that these expenses are outside of those that would be incurred by an individual investor," Weissbart says.
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“Tax Deductions for Financial Advisor Fees,” by Coryanne Hicks was published in U.S. News & World Report on December 16, 2021.