How must bundled fees charged by a coporate trustee to the trust be treated? (1)

Question

How must bundled fees charged by a coporate trustee to the trust be treated? (1) bundled fees are fully deductible in computing trust adjusted gross income (2) bundled fees are only deductible as itemized deductions subject to the 2% of adjusted gross income limitation (3) bundled fees are to be allocated between expenses allowed in computingan adjusted fross income and those not so allowed by use of a reasonable method (4) bundled fees may not be allocated by looking at the percentage of the fudiciary's time devoted to investment advice as opposed to that dealing with beneficiaries or other trust matters

Explanation / Answer

ANSWER:
In the preamble to the final regulations, the IRS explained that it received many comments on the treatment of "bundled" fees in the proposed regulations. Bundled fees are the fees that are billed together, where a portion is fully deductible and another is the subject to 2%-of-AGI floor. The proposed regulation would require the deductible and non-deductible portions to be "unbundled" that is allocated between the cost that is subject to the 2% floor and those that are not. The proposed regulation contains one exception to the allocation requirement :
If a bundled fee is not computed on an hourly basis, only the portion attributable to investment advice (including any related service that would be provided to any individual investor as a part of investment advisory fee) is subject to the 2% floor.

Commentators objected to the administrative difficulty of unbundling fiduciary fees and the IRS did not enforce unbundling pending the issuance of final regulations (NOTICE 2011-37). However, despite the objections of these commentators, the final regulation does include the unbundling requirement.

Generally, under the final regulation, the portion of a bundled fiduciary fee attributable to investment advice will be subject to 2% floor. Any fiduciary fee not located to the investment advice and not calculated on an hourly basis will be fully deductible without regard to 2% floor except for :

If amounts are allocable to investment advice but are not traceable to separate payments, the final regulation allows the use of "any reasonable method" to make the allocation to investment advice. The regulation includes a listing of the facts that may be considered in determining whether an allocation is reasonable.

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