Are Attorney Fees for Estate Planning Tax Deductible?

One of the most crucial things in ensuring your family has a bright future and safeguarding your wealth is estate planning. Several Americans go to the lawyers to write wills, create trusts, and other significant legal documents. But there is one question that arises in the process and that is: Are attorney fees on estate planning tax deductible?

The solution is not quite simple. Some legal fees were paid to qualify and be deductible, however recent changes in the law on taxation have impacted the application and applicability of such deductions. We shall divide it down into plain words.

Understanding Estate Planning and Attorney Fees

It is good to know what estate planning entails before we begin on the tax.

Estate planning refers to the act of creating legal papers that specify how your property will be used, shared or utilized in case you become incapacitated or die. 

Examples of typical estate planning documents are:

• Wills
• Living trusts
• Powers of attorney
• Health care directives
• Beneficiary designations.

The majority of the people seek the services of an attorney to ensure that these documents are in line with the state laws and they represent their desires correctly. Estate planning attorney fees may involve consultations, drafting, and continuing advice on asset protection or tax.

The Basic Rule: Personal Legal Fees Are Not Deductible

The personal legal expenses are not usually tax deductible according to the U.S. tax law. The IRS does not consider estate planning as business and income-generating, which is why they consider it as a personal affair, or more precisely, something that is done in the interest of the family and your own well-being.

It implies that the expenses of writing a will, writing a living trust, or writing powers of attorney should not be allowed to deduct it on your income taxes.

There are however, exceptions as in most tax matters.

When Attorney Fees May Be Partially Deductible

Although most of the estate planning fees are personal in nature, a portion can be connected to tax advice or income-generating activities, which can be deductible in certain circumstances.

Tax-Related Legal Advice

In case you have been advised by your attorney to pay less estate taxes or less income taxes, that particular aspect would be deductible. The IRS permits the deductions of legal expenses of tax determination, collection, or refund.

For example:

• In case your lawyer assists in estimating your estate tax,
• To you advises how to form a trust to cut taxes,
• Or will give advice on how investment returns would be taxed,

Then such parts of the legal bill can be considered deductible tax advice.

Business or Income-Producing Activities

In case your estate plan includes the ownership or income-generating property in business, a certain amount of legal work directly related to that property can be deducted as well.

For example:

• In case your lawyer assists in organizing a trust which will run rental properties,
• Or write wills to dispose of property of business by your death,
• The charges on such income-generating assets can be considered deductible business expenses.

It should be mentioned that the deductible portion of fees is only related to tax or income generating activities. You cannot claim the deduction based on the fact that some of the estate planning bill will cover tax advice.

The Impact of the 2017 Tax Cuts and Jobs Act (TCJA)

Prior to 2018, taxpayers were allowed to claim some miscellaneous itemized deductions such as some legal and accounting fees that were in excess of 2% of their adjusted gross income (AGI). A lot of individuals took advantage of this regulation to claim part of their estate planning costs that were deemed as tax advice.

Nevertheless, the Tax Cuts and Jobs Act (TCJA) postponed such miscellaneous itemized deductions between 2018 and 2025. This implies that even the deductible amount of the estate planning expenses cannot be claimed as of now on a personal tax return by most tax payers.

These deductions are not available yet unless the Congress alters the law or the suspension lapses after 2025.

Estate and Trust Tax Returns (Form 1041)

Although people are not allowed to deduce most of the legal cost on the planning of their estates at the moment, the same does not apply to the estate and trust.

This means that some of the administrative expenses can be deductible when an estate or trust files its own tax return (Form 1041). 

These are attorney fees which are:

• Compensated to manage the estate or the trust
• Necessary to collect income
• Or concerning the management of property belonging to the estate or trust.

Therefore, when you are dealing with an estate following the death of another person, the attorney fees billed to the estate, not to you, per se, may be deductible on the tax return of the estate.

Keeping Records for Possible Deductions

Although the majority of the estate planning expenses are not deductible nowadays, it is still a prudent move to maintain accurate documentation of what your lawyer is billing you.

Request your attorney to list the bill, dividing the time spent on:

• Writing personal papers (such as a will or a power of attorney)
• Providing tax advice
• Managing business or investment related matters.

When the tax laws are changed in future, clear documentation will help in ascertaining which of your fees can be deducted.

Practical Tips for Managing Estate Planning Costs

The following are some of the useful tips to ensure that you maximize on your estate planning costs:

Ask for an Itemized Invoice

This will assist in determining what parts may be available as tax deductions in future.

Bundle Related Services

In other cases, lawyers are also willing to package several estate planning documents at a lower fee.

Review Annually

Personal circumstances and tax laws evolve. Have your attorney and financial advisor review your estate plan on a regular basis.

Arrange with Your Tax Expert

The assistance of a CPA or tax preparer can be used to determine whether any portion of your attorney fees is deductible, particularly when you have a business or other complex assets.