Estate planning is a critical part of transferring wealth, but the process comes with some costs. That leaves many to wonder, “is estate planning tax deductible?” Tax deductions lower your taxable income; they reduce the amount of tax you owe. The IRS allows deductions for certain expenses, but there are rules about what qualifies.
In general, personal expenses are not tax-deductible. However, costs related to earning income or running a business might qualify. Estate planning fees often fall into a gray area. Some fees are personal, while others relate to managing investments or business assets.
Knowing the difference is important. It helps you figure out which parts of your estate planning costs might be deductible. This guide will explore the nuances of estate planning and taxes.
What Are Estate Planning Fees?
Estate planning costs depend on the complexity of your needs. Typical fees include:
- attorney fees
- financial advisor fees
- tax planning
- document filing
- trust management
- notary fees
- document storage
These costs add up and you’re not alone in wondering if these estate planning fees are tax deductible. Most estate planning fees are not tax-deductible. The IRS considers them personal expenses. This includes costs for creating wills, trusts, or powers of attorney for personal use.
When Are Estate Planning Fees Tax Deductible?
Some estate planning fees may be deductible, but only under very specific conditions. These conditions depend on how the fees relate to how income is generated and your business activities:
Fees for estate planning are tax deductible if they:
- manage income-producing property or investments
- protect or manage business assets
Fees for personal estate planning are not deductible. So that includes services like creating a will or trust for family use. Again, the IRS treats these as personal expenses.
What exactly are considered income-producing investment? Any investment assets like rental properties or stocks are income-producing. If the fees are related to protecting, maintaining, or handling these assets, then they are tax deductible.
For example, what if you have dividend-generating stocks. If you hire an attorney for set up a trust to manage these assets, then those attorney fees for estate planning are tax deductible. The same would apply to a trust for rental properties that earn passive income.
Succession planning for businesses, especially family businesses, is also a part of estate planning. You may need legal help to draft documents for a transfer of business ownership. In this case, attorney fees are tax deductible for estate planning because these aren’t personal expenses. Your business earns income even if it is family-owned and being transferred to another relative.
Business interests are also another are to consider. Appointing a financial power of attorney to handle business transactions is critical. These legal fees for estate planning are tax deductible. If you’re seeking financial and legal advice about investment management, then those estate planning legal fees are tax deductible as well.
If some of your fees qualify, keep detailed records. A tax professional can review your situation and help determine what is deductible.
Wasn’t Tax Estate Planning Tax Deductible Before?
In the past, estate planning was tax deductible. However, this isn’t the case anymore because of changes from the Tax Cuts and Jobs Act of 2017. This law suspended many miscellaneous itemized deductions, including some related to estate planning. These rules will remain in place until at least 2025.
These rules are subject to change with further amendments to the law, so it’s always best to consult with tax professionals to determine if your situation qualifies for tax deductions.
How Can Estate Planning Help Lower Taxes?
The costs for estate planning may be a deterrent for some, but it shouldn’t be. While estate planning isn’t tax deductible for most, there are still benefits to having professional help. Estate planning can still be tax advantageous when you have the right team and guidance. There is no price that you can really put on peace of mind and making sure your estate is protected.
Avoid Probate Costs
Probate isn’t inherently bad, but the mere thought of it causes headaches.
It’s a legal process if distributing assets, but it’s resource hungry. The cost of probate eats up time and money. The result is less assets to pass on to your beneficiaries. You can avoid this with estate planning to name beneficiaries on accounts and setting up trusts.
Another issue is privacy—probate is a public process. Unless you want your private business on record, estate planning is a great option to keep your private affairs private. It also removes the unnecessary burden of having unwanted attention from those who may want to challenge your wishes, particularly if you have a high net worth.
Plan for Capital Gains
There are some strategies you can use to avoid capital gains tax. When your heirs inherit property, the IRS uses something called a step-up in basis. This means they won’t owe taxes on any gains during your lifetime—only on future increases in value.
If you transfer assets wisely, like appreciated stock or real estate, you can reduce the tax burden for your heirs. So while you’re estate planning isn’t tax deductible now, your heirs can still benefit from a lighter tax load in the future.
Leverage Tax Tools
Tools like irrevocable trusts or family limited partnerships can protect your heirs from heavy taxation. These are legal structures that move assets out of your taxable estate. The upside is that you have control over them and benefit from them.
Estate planners can also help you with gift tax exemptions which reduce the size of your taxable estate. You could use this to give heirs part of their inheritance and avoid tax penalties.
Set Your Financial Legacy
No two financial situations are they same. Why work with a team that isn’t dedicated to personalized service. As fiduciaries, we take a comprehensive look at our clients’ portfolios to help them meet their goals.
The team at Asset Preservation Wealth and Tax are big picture people; we work with a network of certified tax professionals and attorneys to give sound advice. We value open communication with our clients so they understand how we can make their assets work for them.
Work with the right team today!
Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
The commentary on this blog reflects the personal opinions, viewpoints and analyses of the author, Stewart Willis, providing such comments, and should not be regarded as a description of advisory services provided by Foundations Investment Advisors, LLC (“Foundations”), an SEC registered investment adviser or performance returns of any Foundations client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment, legal or tax advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Personal investment advice can only be rendered after the engagement of Foundations for services, execution of required documentation, including receipt of required disclosures. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Foundations manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Any statistical data or information obtained from or prepared by third party sources that Foundations deems reliable but in no way does Foundations guarantee the accuracy or completeness. Investments in securities involve the risk of loss. Any past performance is no guarantee of future results. Advisory services are only offered to clients or prospective clients where Foundations and its advisors are properly licensed or exempted. For more information, please go to https://adviserinfo.sec.gov and search by our firm name or by our CRD # 175083.
