Whether it is because of state law restrictions or preneed purchaser demographics, death care trusts have unique requirements when it comes to investments. Consequently, it is fairly common for a death care trust to utilize an investment advisor who has experienced with the industry. However, the deductibility of the fees paid to outside advisors by death care trustees will now be more closely scrutinized in light of a January 16th decision handed down by the US Supreme Court in the case titled Knight vs. Commissioner.
The conflict over the deductibility of investment advisor fees developed within the context of estate planning trusts, and has been brewing since 1993 when the Sixth Circuit rejected the IRS’ position in O’Neill vs. Commissioner of Internal Revenue, 994 F.2d 302. In subsequent cases in other circuits, the IRS prevailed in its application of IRC Section 67(a) and the 2% floor. Like side catch in a commercial fishery net, death care trusts are being pulled into a controversy based on estate planning facts.
The impact of this issue on some death care trusts is felt not so much by the 2% floor, but by a collateral issue: the alternative minimum tax. For maintenance trust returns, the characterization sought by the IRS renders the advisory fees fully taxable. And, the arguments forwarded by the IRS in its briefs to the Supreme Court and the lower courts suggest that the Service may look at other types of services outsourced by the fiduciary.
The Supreme Court left the door cracked for the full deductiblity of fees paid to trust service providers, but the death care companies will have to work with their fiduciaries to justify the deduction of such fees. To defend the deduction, the parties have to start with their trust instrument and administration documents to define the services and justify their need.