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ABA Members Reiterate Concerns About Proposed Regs on Trust Fees Subject to 2 Percent Floor

MAY 6, 2009

ABA Members Reiterate Concerns About Proposed Regs on Trust Fees Subject to 2 Percent Floor

DATED MAY 6, 2009
DOCUMENT ATTRIBUTES
  • Authors
    Akers, Stephen R.
  • Institutional Authors
    American Bar Association Section of Real Property, Trust and Estate Law
  • Cross-Reference
    For Notice 2008-32, 2008-11 IRB 593, see Doc 2008-4131 or

    2008 TNT 40-9 2008 TNT 40-9: Internal Revenue Bulletin.

    For the Supreme Court's opinion in Michael J. Knight v.

    Commissioner, 128 S. Ct. 782 (2008), see Doc 2008-948 or

    2008 TNT 12-6 2008 TNT 12-6: Court Opinions.

    For REG-128224-06, see Doc 2007-17447 or 2007 TNT

    145-12 2007 TNT 145-12: IRS Proposed Regulations.

    For related correspondence from section members, see Doc

    2008-11385 or 2008 TNT 101-20 2008 TNT 101-20: IRS Tax Correspondence.
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2009-10312
  • Tax Analysts Electronic Citation
    2009 TNT 87-16

 

May 6, 2009

 

 

The Office of the Assistant Secretary for Tax Policy

 

Elizabeth Garrett, Nominee

 

U.S. Department of the Treasury

 

1500 Pennsylvania Avenue, NW

 

Washington, D.C. 20220

 

 

Re: IRS Proposed Regulation 26 CFR 1.67-4, REG-128224-06 Regarding Fees of Trusts and Estates

Dear Ms. Secretary:

The following comments are submitted by the American Bar Association ("ABA") Section of Real Property, Trust and Estate Law. The comments have not been approved by the House of Delegates or the Board of Governors of the ABA and should not be construed as representing the position of the ABA. The comments were prepared by the Individual and Fiduciary Income Tax Committee of the ABA Section of Real Property, Trust and Estate Law ("Committee"). The Committee wishes to express certain of its concerns over a proposed Treasury Department regulation § 1.67-4(c), which would require trustees and executors to "unbundle" their single commission fees and, if made a final regulation, would have a significant adverse impact on fiduciary administration.

Under the proposed regulation, fiduciaries would be required to unbundle or break down their fees to determine the nature of the services rendered and to what extent, if any, the component parts, otherwise deductible under section 212 of the Internal Revenue Code of 1986 as amended ("IRC"), may be subject to reduction by the "2-percent floor" pursuant to IRC Sections 67(a) and 67(e). The ABA Section of Real Property, Trust and Estate Law previously expressed concerns about unbundling to the Internal Revenue Service "IRS") and the Treasury Department in May 2008 ("2008 Report").1 It pointed out that unbundling is required neither by the statute nor by the Supreme Court's decision in Knight v. Commissioner2 and that it would be extremely burdensome and impractical, if possible at all, for trustees and executors to implement and the IRS to enforce.

Recently, new concerns have arisen that we ask the Treasury Department to consider when drafting any final regulations. The requirement to unbundle trustee fees for income tax purposes may have the unintended effect of causing beneficiaries to assert that costs should be consistently allocated under state law. Under the Uniform Principal and Income Act of nearly all states and many trust agreements, trustee fees, custodial fees, and investment management fees are paid equally from the trust's income and principal. But most other administrative costs are often paid entirely from fiduciary accounting income. These costs may include property management, tax preparation, fiduciary bond premiums, "tax lot" accounting, legal research, review of the governing instrument, verification of situs, review of life and other insurance policies, review of distribution requirements, review of investment policies and portfolio allocation in light of the governing instrument and the Prudent Investor Act, appraisal fees, supplies, salaries, consultants' fees, rent, consideration of tax elections, analysis of generation-skipping tax implications, communicating with the beneficiaries, lawyers, accountants, and others, and a host of other products and services too numerous to mention.

We are concerned that if, for example, the trustee's fee is allocated half each to income and principal, the principal beneficiaries may claim that the separate components identified for tax purposes should be allocated entirely to income, if those separate components would be so allocated under applicable state law. On the other hand, if the trustee allocates the separate components to income based on state law or the terms of the governing instrument, the income beneficiaries will bear a greater share of the administrative costs. Thus, they will likely claim that the allocation to income is not proper because the components are really part of the overall trustee fee, which is generally allocated one-half to principal. To avoid such disputes, it may be incumbent on trustees in the 27 states that authorize conversion to a unitrust, for those trustees to consider converting, because after such a conversion, the allocation of an expense to income or to corpus does not affect the amount that must be paid to the income beneficiaries. We do not believe that Congress intended such a far reaching effect under IRC § 67(e).

We also believe that unbundling will cause other administrative problems for trustees -- and the government. Under the laws of most states, the amount of a fiduciary's fee is required to constitute "reasonable compensation." Fiduciaries' fees, therefore, generally reflect the unique aspects of the specific trust or estate in question. They also vary widely from trust to trust, year to year, and from state to state. As a consequence, an unbundling requirement would require trustees to unbundle on a case by case basis each trust and estate, at an enormous cost to trustees, executors, and their beneficiaries as well as to the IRS. Unbundling also increases the overall uncertainty of fiduciary administration. Therefore, it seems that unbundling is an impractical and unworkable requirement aimed at nonexistent abuses, and which has consequences far beyond what Congress intended under Section 67(e).

Nonetheless, if the final regulations maintain the unbundling requirement, we request that they advise fiduciaries in detail how unbundling should be accomplished in a manner that is both fair and workable. The regulations could, for example, require a breakdown by each person of a trust company that worked on any matter for the trust or estate and what that person's responsibility is, and so forth. And given that the Supreme Court in Knight acknowledged that some investment advisory fees might not be subject to the 2-percent floor, fiduciaries need guidance on how to determine which of their investment fees are fully deductible and which are subject to the 2-percent floor under IRC § 67. We also recommend that the final regulations clearly articulate any standard of proof that must be met.

For those reasons and for the reasons expressed in the 2008 Report and at the November 14, 2007 hearing, we hope that the Treasury Department will reconsider its proposal to require unbundling of fiduciary fees. If not, we respectfully suggest that another hearing on any unbundling proposal would be helpful.

We thank you for your consideration of our concerns about the proposed regulation. Carol A. Cantrell, Chair of the Individual and Fiduciary Income Tax Committee, supervised the preparation of these comments and participated in their presentation along with Martin M. Shenkman, Robert E. Barnhill, and Robert S. Balter. These comments were reviewed by Jonathan G. Blattmachr on behalf of the Section's Committee on Government Submissions.

Although the Committee members who prepared these comments have clients who would be affected by the Federal tax principles addressed, or have advised clients on the application of such principles, no such member (or the firm or organization to which such member belongs) has been engaged by a client to make a submission with respect to, or otherwise influence the development or the outcome of, the specific subject matter of these comments.

If you have any questions or if we can be of further assistance, please write or call Carol A. Cantrell at 713-667-9147, or ccantrell@bvccpa.com.

Respectfully submitted,

 

 

Steve R. Akers

 

Section Chair

 

cc:

 

Mr. Eric San Juan,

 

Acting Tax Legislative Counsel,

 

Treasury

 

 

Ms. Catherine V. Hughes,

 

Attorney-Advisor,

 

Office of Tax Policy,

 

Treasury

 

 

Ms. Clarissa C. Potter,

 

Acting Chief Counsel,

 

IRS

 

 

Mr. Curtis G. Wilson,

 

Associate Chief Counsel

 

(Passthroughs and Special Industries),

 

IRS

 

 

Ms. Jennifer N. Keeney,

 

Attorney-Advisor,

 

Office of Associate Chief Counsel

 

(Passthroughs and Special Industries), Branch 2,

 

IRS

 

 

Bernice B. Donald,

 

Secretary,

 

American Bar Association

 

 

Thomas M. Susman,

 

Director,

 

Governmental Affairs,

 

American Bar Association

 

FOOTNOTES

 

 

1 ABA Section of Real Property, Trust, and Estate Law comments to IRS and Treasury on REG-128224-06 dated May 21, 2008, available at www.regulations.gov. Similar concerns were also expressed in the November 14, 2007 Treasury Department hearing by many witnesses.

2Knight v. Comm'r, 128 S. Ct. 782 (2008).

 

END OF FOOTNOTES
DOCUMENT ATTRIBUTES
  • Authors
    Akers, Stephen R.
  • Institutional Authors
    American Bar Association Section of Real Property, Trust and Estate Law
  • Cross-Reference
    For Notice 2008-32, 2008-11 IRB 593, see Doc 2008-4131 or

    2008 TNT 40-9 2008 TNT 40-9: Internal Revenue Bulletin.

    For the Supreme Court's opinion in Michael J. Knight v.

    Commissioner, 128 S. Ct. 782 (2008), see Doc 2008-948 or

    2008 TNT 12-6 2008 TNT 12-6: Court Opinions.

    For REG-128224-06, see Doc 2007-17447 or 2007 TNT

    145-12 2007 TNT 145-12: IRS Proposed Regulations.

    For related correspondence from section members, see Doc

    2008-11385 or 2008 TNT 101-20 2008 TNT 101-20: IRS Tax Correspondence.
  • Code Sections
  • Subject Area/Tax Topics
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2009-10312
  • Tax Analysts Electronic Citation
    2009 TNT 87-16
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