Estate planning is an all-encompassing term used to describe the process of managing your assets and financial affairs after your passing. Given the complexities, many seek to use professionals and wonder whether fees related to estate planning are tax deductible. This discussion provides the answers.
Estate planning isn’t just for the wealthy, but it’s for anyone who wants to secure their financial legacy and protect their family’s future. By establishing an estate plan, you can ensure your assets are fairly distributed after your death and reduce potential tax burdens. However, one aspect often overlooked is the costs involved.
They add up quickly, leading taxpayers to seek relief through a tax deduction.
What makes estate planning essential?
In the U.S. the distribution of assets after death is governed by state-specific probate laws, which determine how property and assets are passed if a person dies with or without a will. If a person does not have a valid will, the assets are distributed according to intestate succession laws.
In some states, there are community of property laws where the assets are given to the living spouse. However, this may not be representative of the wishes of the deceased and can sadly cause assets to be distributed to the wrong parties.
Even if a will is in place, there can be unintended tax burdens placed on surviving family members. Thus, estate planning is a way to prevent this, and execute the wishes of the deceased, regarding property and other assets.
Achieving the fair distribution of assets, especially in complex financial situations, requires the services of a tax professional, accountant, or lawyer - and sometimes all of these. So, it is important to know whether you can recoup these costs through a tax deduction or not.
A look back: Estate planning fees prior to 2018
Before 2018, estate planning costs were indeed deductible. The IRS allowed taxpayers to deduct some estate planning expenses as miscellaneous itemized deductions on Schedule A of Form 1040. These tax deductions included:
Costs associated with setting up trusts and investment accounts aimed at generating income, e.g. legal fees related to hiring an experienced estate planning attorney
Costs associated with Investment advice
Fees for managing an income producing property
Estate planning fees directly related to tax planning advice
However, these miscellaneous deductions were subject to a 2% adjusted gross income (AGI) floor. This meant that only expenses exceeding 2% of a taxpayer’s AGI could be deducted. For instance, if an individual’s AGI was $100,000, only the portion of estate planning fees above $2,000 was deductible.
The Tax Cuts and Job Act (TCJA) and its implications
The Tax Cuts and Jobs Act (TCJA), signed into law in December 2017, introduced significant changes to the U.S. tax code and the estate planning process, impacting the ability to deduct estate planning fees.
For tax years 2018 through 2025, the TCJA suspended all miscellaneous deductions subject to the 2% AGI floor. This means that currently deducting estate planning fees from your taxes is not an option.
Post 2025 considerations: Will these deductions return?
The estate planning tax deductible will be up for review after Dec. 31, 2025. At this point, unless Congress enacts new laws, the deductions can return. Given the uncertainty surrounding tax law changes, it’s crucial to stay informed about potential shifts in the tax code that could impact estate planning deductions.
Strategies for managing estate cost effectively
Given that estate planning legal expenses and other estate planning fees are not deductible in the short term, there are several strategies you could employ to reduce costs.
Negotiate fees - Some professionals offer flexible fee structures. Don’t hesitate to discuss this with your accountant or attorney. For instance, a CPA firm may bundle estate planning with their wealth management or tax planning services.
Compare service providers - Estate and tax planning vary greatly from one service provider to the next. Compare multiple professionals, and contact local providers who have an interest in keeping wealth in the community.
There are also some expenses related to tax advice or tax preparation for dealing with estate taxes that are still deductible. These can offset the cost of estate plans while the suspension is in place. Speak to your tax professional to find out how the Internal Revenue Service deals with these deductible expenses.
Hall Accounting Company: Your trusted partner for individual tax planning
Estate planning and the taxes involved in this process can become complicated. You need a partner you can trust with your assets that will help you make the best decisions for your family and their future once you are gone.
We have a team of highly experienced senior tax associates who work tirelessly to cover your options across the board when it comes, not only to estate planning and the associated taxes, but also to your individual tax obligations. Our comprehensive tax planning services in Dallas ensure that all aspects of your financial health are considered, from estate management to personal tax optimization.
Our experts keep abreast of the latest changes in tax legislation and inform you of how these changes can potentially affect your personal wealth and tax responsibilities. With temporary exemptions, like the estate tax exemption, set to expire at the end of 2025, now is the time to begin planning the future for your family in your absence.
Tax planning is a holistic exercise that should take all facets of your finances into account, and search for ways to maximize allowable deductions, exemptions, and credits. It’s about more than getting your tax return in on time. The sooner you begin utilizing every tax saving opportunity you have, the better it is for your long-term financial health.
Call us today to book a free, initial consultation. During this meeting, we will listen to your individual needs and aim to help you with solid financial planning advice.
Concluding Thoughts
While current U.S. tax law does not allow for the deduction of estate planning fees, this essential process remains a vital part of securing financial peace of mind and ensuring that your assets are distributed according to your wishes.
Taking action today means greater financial stability for your loved ones tomorrow. Reach out to a trusted tax professional to begin exploring your options and making informed decisions about your financial future.