Are Estate Planning Fees Tax Deductible in 2022?

It was mid-2022 when Jane first realized that she might be leaving money on the table—tax money, to be specific. She had been meticulously handling her finances, ensuring every deductible penny was accounted for. But the realm of estate planning seemed murkier than her usual tax filings. Could those lawyer fees, financial advisor consultations, and legal documents be tax-deductible?

The answer to her question was both yes and no.

Estate planning can be a complex and nuanced process. While some expenses tied to estate planning are deductible, others are not, and the distinction between the two often lies in whether the fees were tied to tax-related services.

What Are Estate Planning Fees?

Estate planning involves arranging the transfer of assets, property, and wealth after one's death. It can include writing a will, setting up trusts, appointing executors, and more. Typically, estate planning professionals such as attorneys, accountants, and financial advisors charge fees for their services.

What the IRS Says

In 2022, the IRS had specific guidelines regarding what estate planning fees are deductible. Fees associated with creating or maintaining income-generating assets—such as advice on transferring assets to a trust or preserving family business ownership—could be deductible. On the other hand, expenses tied purely to personal aspects of estate planning, like drafting a will, are generally not deductible.

This is where it gets tricky.

Many estate planning tasks blur the lines between tax planning and personal planning. As Jane discovered, consulting a professional could help clarify what is and isn't deductible.

The Fine Line: Deductible vs. Non-Deductible Expenses

1. Deductible Fees: These are usually tied to managing or conserving income-producing property. For example, fees paid to an attorney to help minimize estate tax liabilities might be deductible. Additionally, if estate planning involves setting up a trust for income-generating investments, a portion of those fees could qualify for deduction.

2. Non-Deductible Fees: Personal aspects, such as creating a will or establishing healthcare directives, do not qualify as deductible expenses. Since these services do not contribute to income generation, the IRS classifies them as personal and non-deductible.

Jane’s estate planning attorney offered an interesting piece of advice. If some aspects of estate planning contribute to future income or help avoid future tax liabilities, the IRS might allow a partial deduction.

Changes in Tax Deductions for 2022

The tax landscape has been shifting, and estate planning fees have not been spared. Historically, there was broader leeway in deducting such expenses, but changes in tax laws in recent years have reduced the number of available deductions. After the passage of the Tax Cuts and Jobs Act (TCJA) in 2017, many deductions were minimized or eliminated, impacting what could be written off.

Before 2017, certain miscellaneous deductions, such as investment advisory fees, tax preparation fees, and estate planning costs, were allowed for itemizing taxpayers. However, after the TCJA, these miscellaneous itemized deductions, which were subject to the 2% of adjusted gross income floor, were suspended through 2025.

What You Can Do: Navigating the Deduction Maze

Given the complexity of estate planning fees and their deductibility, there are a few steps you can take to ensure you're not missing out on potential tax savings.

1. Consult a Tax Professional: As Jane eventually did, seeking professional advice can help you understand which parts of your estate planning are tax-deductible. While the laws can be complicated, a tax advisor can help itemize fees and clarify which portions relate to income-generating activities.

2. Keep Detailed Records: Document every payment you make during the estate planning process. Break down the services rendered, as this will be important for claiming deductions. For example, if your financial advisor provides both tax planning and general financial advice, itemizing the invoice can ensure that tax-related services are accounted for correctly.

3. Stay Updated on Tax Law Changes: The laws governing tax deductions evolve, and what may not be deductible today could change in future tax years. The estate planning tax deduction landscape could look very different by 2025 when the TCJA expires.

Mistakes to Avoid: Common Misconceptions

Jane wasn't alone in her confusion. Many people mistakenly believe that all estate planning fees are deductible, or they fail to differentiate between deductible and non-deductible expenses.

Here are a few common pitfalls:

• Assuming a blanket deduction for all legal fees: Many assume that if they pay a lawyer for estate planning, it's automatically deductible. This is incorrect. Only tax-related advice or services directly linked to income generation or conservation qualify.

• Failing to break down invoices: If your lawyer or financial advisor doesn’t provide a detailed breakdown of services, you may miss out on deductions. Ensure each fee is categorized so that deductible services can be claimed.

• Overlooking trust fees: Fees associated with setting up or maintaining a trust for income-generating assets could be deductible. However, failing to clarify the purpose of the trust with your advisor might lead to missed opportunities for deductions.

Real-Life Example: How Jane Maximized Her Deductions

After consulting with her accountant, Jane learned that some of her estate planning fees could indeed be deducted. The attorney had advised on creating a trust that would manage rental properties Jane owned, with the goal of minimizing taxes. While drafting her will was not deductible, the trust-related advice fell under income-generating asset management, and a portion of the fees could be deducted.

By the end of the process, Jane had saved a significant amount on her taxes. It wasn’t the full amount she had hoped for, but it was a relief to know that she hadn’t left any money on the table.

Conclusion: A Gray Area Worth Exploring

Are estate planning fees tax-deductible in 2022? Yes, but only partially and with specific conditions. The process of estate planning inherently involves both personal and financial aspects. Understanding which fees qualify for deduction requires careful documentation and professional guidance.

For individuals looking to maximize their tax savings while planning their estates, it’s crucial to know the difference between personal and tax-related services. As laws evolve, the future may bring new opportunities for deductions, but for now, careful planning and professional advice are the keys to navigating this gray area.