Are Investment Management Fees Tax Deductible For Trusts? | Clear Tax Rules

Most routine investment fees paid by a trust are not deductible right now, but some fiduciary-only costs can still reduce taxable income.

Trustees and beneficiaries often assume every dollar of investment management fees paid from a trust will offset taxable income. Under current U.S. tax rules that assumption rarely holds. Since the Tax Cuts and Jobs Act changed section 67 of the Internal Revenue Code, many costs that once produced a deduction now sit in a suspended category.

Investment Management Fees For Trusts And Their Tax Treatment

When people ask whether investment fees in a trust are deductible, they usually mix together very different expenses. Tax law splits trust costs into two basic groups. One group covers charges any investor might pay in a regular brokerage account, such as a standard percentage-based advisory fee. The other group covers costs that arise only because the assets sit in a fiduciary structure.

Section 67 of the Internal Revenue Code and related Treasury regulations handle this split. Under section 67(e), a trust can deduct expenses that arise solely because property is held in an estate or non-grantor trust rather than directly by an individual. Those costs are treated as deductions in arriving at adjusted gross income and stay outside the suspended class of miscellaneous itemized deductions. The
Treasury regulations under section 67(e) explain this in detail.

By contrast, expenses that look the same as those an individual investor would pay fall into the miscellaneous itemized deduction category. Section 67(g), added by the Tax Cuts and Jobs Act, suspends that category of deductions for tax years 2018 through 2025. That change closed the door on many investment management fees that used to reduce taxable income for trusts.

Quick Snapshot Of Current Law

For a non-grantor trust, income and most deductions appear on Form 1041, the U.S. Income Tax Return for Estates and Trusts. The IRS instructions explain which lines hold administration expenses and which ones are no longer available for suspended investment deductions. They stress that placing an expense in the wrong spot can lead to adjustments. The IRS instructions for Form 1041 are the primary roadmap for this reporting.

Are Investment Management Fees Tax Deductible For Trusts?

Under current federal rules, most standard investment management fees paid directly by a trust do not create a deduction. They fall into the suspended category of miscellaneous itemized deductions that section 67(g) blocks for both individuals and non-grantor trusts during the 2018–2025 period. In practical terms, those fees are ignored when taxable income is calculated.

The main exception involves expenses that relate only to fiduciary administration. Many trustees pay bundled fees that cover both investment management and trustee services under one combined schedule. In those cases, the trustee has to separate the fee into two pieces. The part that relates to general investment advice is not deductible. The part that relates to fiduciary-only work, such as required accountings or mandatory filings, can still reduce taxable income when it qualifies under section 67(e).

Distinguishing Fiduciary Expenses From Investment Expenses

Section 67(e) and the related regulations use a straightforward question. Would this expense have been incurred if the assets were held directly by an individual with the same goals? If the answer is yes, the expense looks like a standard investment cost and falls under the suspended category. If the answer is no, the expense points to fiduciary administration and may remain deductible.

Examples of deductible fiduciary expenses include court accountings required under local law, preparation of Form 1041, and certain legal fees that relate only to trust interpretation or mandatory distributions. The University of Illinois Tax School article on deductible expenses when closing an estate or trust gives a helpful summary of how these administration costs work in practice.

Common Trust Investment Expenses And Their Tax Outcome

Real trust invoices rarely label each line as “deductible” or “not deductible.” To make sense of them, a trustee sorts each cost into deductible, non-deductible, or bundled items.

Expense Type	Typical Federal Tax Treatment	Notes For Trustees
Standard investment advisory fee	Not deductible through 2025	Treated as a suspended miscellaneous itemized deduction tied to investment income.
Trustee fee for fiduciary services	Generally deductible	Portion tied to administration, recordkeeping, and required accountings may qualify under section 67(e).
Custodial or safekeeping fee	Often not deductible	Viewed as an ownership cost that an individual might also pay for a personal account.
Tax preparation fee for Form 1041	Deductible	Preparation of a fiduciary income tax return is unique to the trust and treated as an administration cost.
Legal fees to interpret trust terms	Deductible	Regarded as fiduciary administration when tied to guidance on required distributions or trust powers.
Appraisal fees for required valuations	Sometimes deductible	May qualify when needed for trust administration or required reporting, not just for a sale decision.
Brokerage commissions on trades	Not deductible as expenses	Added to basis or offset against sale proceeds rather than taken as current expenses on Form 1041.

How Section 67(e) And 67(g) Shape Trust Deductions

Two parts of the Internal Revenue Code drive the answer for trust investment fees. Section 67(e) sets out the rule that certain administration costs are treated as above-the-line deductions for a trust. Section 67(g), added by the Tax Cuts and Jobs Act, suspends miscellaneous itemized deductions that fall under the 2 percent adjusted gross income floor through 2025.

Treasury regulations under section 67(e) explain that an expense qualifies for the trust-only category when a hypothetical individual owning the same property would not typically pay that cost. Examples include required fiduciary accountings and legal advice about mandatory distributions. These costs arise from the fiduciary relationship itself. The regulations appear in the federal electronic code at
26 C.F.R. section 1.67-4.

Expenses that do not meet this test fall into the general investment category. Before 2018, those costs were allowed as miscellaneous itemized deductions to the extent they exceeded 2 percent of adjusted gross income. During the suspension period, that entire class of deductions is disallowed for both individuals and non-grantor trusts, including most routine investment advisory fees.

Bundled Fees And The Need To Unbundle

Many trusts pay one combined fee to a bank or trust company that covers portfolio management, distribution work, tax reporting, and beneficiary communication. When a single charge covers both deductible and non-deductible services, the trustee breaks it into components so that only the administration portion flows to a deduction.

A summary from EY on trustee fee deductibility describes practical methods for separating the administrative portion from the investment portion. The EY discussion of deductibility of trustee fees after the Tax Cuts and Jobs Act explains how bundled fees are unbundled for tax purposes.

Fee Component	Sample Amount	Deductible On Form 1041?
Portfolio management services	$6,000	No, treated as suspended investment expense under section 67(g).
Trustee administration services	$3,000	Yes, qualifies as administration cost under section 67(e) if tied to fiduciary duties.
Total annual bundled fee	$9,000	Only the administration portion flows to a deduction; the rest is ignored for current income tax.

Grantor Trusts Versus Non-Grantor Trusts

Whether a trust is treated as a grantor trust or a non-grantor trust changes how the tax reporting looks, even though the core deduction rules mirror each other. In a grantor trust, one or more people are treated as the owner of trust assets for income tax purposes and report income, deductions, and credits directly on personal returns. A non-grantor trust pays its own tax on income that is not distributed and reports distributions and related deductions to beneficiaries on Schedule K-1.

For grantor trusts, investment management fees carry through to the individual owner. Because section 67(g) also suspends miscellaneous itemized deductions for individuals through 2025, the grantor usually receives no current deduction for routine investment advisory costs paid inside the trust. For non-grantor trusts, these same rules apply at the entity level on Form 1041, with deductions allowed only for qualifying administration expenses under section 67(e).

Practical Steps For Trustees Managing Investment Fees

Trustees who want clean tax reporting around investment charges need more than a single line that says “annual fee.” Clear records and steady communication among the advisor, trustee, and tax preparer help show a reasonable method for separating investment work from fiduciary administration.

One useful step is to ask advisory firms and trust companies to break out their invoices. One line can cover portfolio management, asset allocation, and trading. Another line can cover trust distribution work, accountings required by the governing instrument, and preparation of fiduciary reports. Clear billing makes it easier to justify a deduction for the administration portion under section 67(e).

Practical Takeaways For Trustees

Investment fees inside a trust now sit under a tighter tax regime than they did before 2018. Standard advisory charges paid from trust assets generally do not produce a deduction, whether the trust is a grantor trust or a non-grantor trust. Only those costs that arise solely because property is held in a fiduciary structure, such as required accountings and Form 1041 preparation, retain their place as deductions.

Trustees who understand this distinction can read fee schedules with a sharper eye. By asking advisors to separate administration charges from investment charges and keeping detailed records with help from a fiduciary tax professional, a trustee can claim available deductions without stretching the rules. That approach keeps trust reporting aligned with the Internal Revenue Code, Treasury regulations, and IRS instructions while giving beneficiaries a clearer view of how trust expenses affect results.