Are Attorney Fees Deductible on Form 1041: Section 67(e) Rules

Attorney fees are deductible on Form 1041, but only when the legal work is something that would not have been needed if the property were not held in an estate or trust. That single test, set by Internal Revenue Code Section 67(e), decides whether a legal bill reduces the estate’s taxable income or produces no tax benefit at all.

The Section 67(e) Test

The controlling rule for fiduciary income tax returns is Section 67(e). An estate or non-grantor trust can deduct administration costs above the line only if those costs “would not have been incurred if the property were not held in such trust or estate.”¹

The practical question is this: would an individual who owned the same property have paid for the same service? If yes, the cost is “commonly or customarily incurred” by individuals and fails the test. The IRS looks at the type of service rendered, not what the invoice calls it.² Routine investment advice, for example, is something individuals routinely pay for, so that portion of a legal bill fails Section 67(e) even when an estate attorney delivers it.

Why the Classification Is Now All or Nothing

Before 2018, a legal fee that failed Section 67(e) was still partly usable as a miscellaneous itemized deduction subject to the 2% floor. The Tax Cuts and Jobs Act suspended that entire category starting in 2018, and the One Big Beautiful Bill Act removed the expiration, making the suspension permanent for 2026 and all future tax years.¹

A fee either clears the Section 67(e) bar and is fully deductible on Form 1041, or it produces nothing. There is no partial credit. The Form 1041 instructions state plainly that costs commonly incurred by individuals “are not allowable deductions.”³

Attorney Fees That Qualify

Legal services that exist because an estate or trust exists almost always clear Section 67(e). Common deductible categories include:

Fees for guiding the executor or trustee through probate or trust administration, including court filings and compliance with fiduciary duties.
Legal work interpreting ambiguous terms in a will or trust so the fiduciary can make proper distributions.
Preparing the estate or trust’s Form 1041, the decedent’s final individual income tax returns, and any estate or generation-skipping transfer tax returns. The Form 1041 instructions identify these as fully deductible.³
Defending the estate against a creditor’s claim or pursuing litigation to recover assets that belong to the estate.
Legal advice on resolving IRS issues connected to the estate’s or trust’s tax obligations.

Attorney Fees That Don’t Qualify

The clearest non-qualifying scenario is legal work that serves a beneficiary personally rather than the estate’s administration. If a beneficiary hires their own counsel to contest the will or dispute the size of their inheritance, that fee belongs to the beneficiary. It cannot be claimed on Form 1041.

Less obvious is a category the IRS instructions call out specifically: defense costs for claims against the estate or the decedent that are “unrelated to the existence, validity, or administration of the estate or trust.”³ If the decedent caused a car accident before death and the estate is defending the personal injury suit, that legal cost may not qualify, because the claim arose from the decedent’s conduct, not from the fact that assets are now held in an estate. Contrast that with defending against a creditor who says the estate owes money, which is directly tied to administration and is deductible.

One detail that trips up fiduciaries: fees for preparing gift tax returns are not deductible on Form 1041. The IRS treats gift tax return preparation as something individuals customarily pay for, so it fails Section 67(e).³

Bundled Legal Bills Must Be Allocated

Fiduciaries often receive a single invoice covering both administration work and non-qualifying services like investment advice. The IRS calls these “bundled fees” and requires them to be split between the deductible and non-deductible portions.²

Any reasonable allocation method works. The regulations suggest considering the percentage of the estate subject to investment advice, what a third-party advisor would charge for similar services, and how much of the attorney’s time went to fiduciary functions versus investment guidance. If the non-deductible portion is de minimis, the entire fee can be treated as deductible. For fees not computed on an hourly basis, only the portion attributable to investment advice is non-deductible.²

Ask the attorney for itemized invoices that break down hours by task. The allocation then writes itself, and it holds up if the IRS asks.

Legal Fees Tied to Selling Estate Property

When an estate sells real estate or other assets and incurs legal fees for title work, closing, or sale negotiations, those costs generally don’t go on Line 14 as administration expenses. They are selling expenses that reduce gain or increase loss on the sale. IRS Publication 559 confirms that the double-deduction rule under Section 642(g) “also applies to expenses incurred in the sale of property by an estate.”⁴ The fiduciary chooses: offset the sale proceeds for income tax purposes, or claim the fees as administration expenses on Form 706. Not both.⁵

Choosing Between Form 1041 and Form 706

For estates large enough to file a federal estate tax return, qualifying attorney fees can be deducted on either Form 1041 or Form 706, but not both. Section 642(g) flatly prohibits the double deduction.⁵

To take the deduction on Form 1041, the fiduciary files a written statement affirming the expense has not been claimed on Form 706 and waiving the right to claim it there in the future.⁶ The waiver is permanent once filed. A fiduciary can also split a single legal bill, placing part on Form 1041 and part on Form 706. Which choice saves more depends on the estate’s income tax bracket versus its estate tax rate, and on whether the estate has enough income to absorb the deduction on the fiduciary return. Running the numbers both ways before filing is worth the time.

Where to Report the Deduction on Form 1041

Qualifying attorney fees go on Line 14 of Form 1041, labeled “Attorney, accountant, and return preparer fees.” The line also captures accounting and tax preparation costs.⁷ If the estate is also filing Form 706, attach or file the Section 642(g) waiver.⁴

Keep the detailed invoices. Document the services performed, the time spent on each task, the charges, and the method used to allocate any bundled portions. That paper trail is what defends the Section 67(e) classification if the IRS asks.

Excess Deductions in the Final Year

In the estate or trust’s final year, total deductions sometimes exceed gross income. Those unused deductions don’t vanish. Under Section 642(h), they pass through to the beneficiaries who succeed to the property.⁵

Each beneficiary’s share is reported on Schedule K-1 (Form 1041), Box 11, and each deduction keeps the character it had at the fiduciary level:⁷

Section 67(e) expenses (Code A) stay above the line. The beneficiary claims them as an adjustment to income on Schedule 1 (Form 1040), line 24k, without itemizing.⁸
Non-miscellaneous itemized deductions (Code B) flow to the beneficiary’s Schedule A. The beneficiary must itemize to use them.⁸
Miscellaneous itemized deductions produce no benefit, because the permanent suspension eliminates that entire category.¹

The character-retention rule makes the Section 67(e) classification doubly important. Fees that clear 67(e) give beneficiaries the most favorable treatment available. Fees that fall into the miscellaneous bucket are worthless even after they pass through. When the estate’s final-year legal bills are substantial, getting the classification right at the fiduciary level decides whether those costs produce any tax benefit downstream.

1
Office of the Law Revision Counsel. 26 USC 67 – 2-Percent Floor on Miscellaneous Itemized Deductions
2
eCFR. 26 CFR 1.67-4 – Costs Paid or Incurred by Estates or Non-Grantor Trusts
3
Internal Revenue Service. 2025 Instructions for Form 1041 and Schedules A, B, G, J, and K-1
4
Internal Revenue Service. IRS Publication 559 – Survivors, Executors, and Administrators
5
Office of the Law Revision Counsel. 26 USC 642 – Special Rules for Credits and Deductions
6
eCFR. 26 CFR 1.642(g)-1 – Disallowance of Double Deductions; In General
7
Internal Revenue Service. Instructions for Form 1041 and Schedules A, B, G, J, and K-1
8
Internal Revenue Service. 2025 Instructions for Schedule K-1 (Form 1041) for a Beneficiary Filing Form 1040 or 1040-SR