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

Attorney fees paid by an estate or trust are deductible on Form 1041, but only when they pass a specific test: the fee has to be one that would not have been incurred if the property were not held in the estate or trust. Fees that clear that bar are fully deductible on Line 14. Fees that don’t clear it produce no deduction at all under current law.

The Section 67(e) Test

The controlling rule is IRC 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 whether an individual owning the same property would have paid for the same service. If yes, the cost is treated as one commonly or customarily incurred by individuals and fails the test.

The IRS regulations tell you to look at the type of service actually rendered, not how the invoice is labeled.² Routine investment advice, for instance, is something individuals pay for all the time, so that portion of a legal bill fails Section 67(e) even when the person providing it is the estate’s attorney.

Why Classification Matters More Than It Used To

Before 2018, fees that failed the Section 67(e) test still produced some benefit as miscellaneous itemized deductions subject to a 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 date, making the suspension permanent for 2026 and beyond.¹

So the classification is now binary. A fee that qualifies under Section 67(e) is fully deductible. A fee that doesn’t qualify is worth zero. There’s no floor calculation, no partial credit. The Form 1041 instructions state that costs commonly incurred by individuals “are not allowable deductions.”³

Legal Fees That Qualify

Services that exist only because an estate or trust exists nearly always pass the test. The common categories:

Guidance to the executor or trustee on probate or trust administration, including court filings and fiduciary compliance.
Legal counsel to interpret ambiguous terms in a will or trust document so the fiduciary can make correct distributions.
Preparing the estate or trust’s Form 1041, the decedent’s final individual returns, and any estate or generation-skipping transfer tax returns. These are identified as fully deductible in the Form 1041 instructions.³
Litigation to protect estate assets, such as defending a creditor claim or recovering property that belongs to the estate.
Legal advice on resolving IRS issues connected to the estate or trust’s tax obligations.

One detail catches fiduciaries off guard: fees for preparing gift tax returns are not deductible on Form 1041. The IRS treats gift tax return preparation as a cost commonly incurred by individuals, so it fails Section 67(e).³

Legal Fees That Don’t Qualify

The clearest non-deductible situation is legal work done for a beneficiary’s personal benefit. If a beneficiary hires their own attorney to contest the will or dispute the size of their share, those fees belong to the beneficiary and cannot be claimed on the estate’s Form 1041.

Less obvious is a category the Form 1041 instructions call out specifically: defense of 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 now defending a personal injury suit, that legal cost may not qualify because the claim arose from the decedent’s personal conduct rather than from the fact that assets are held in an estate. Defending against a creditor who says the estate owes money on a debt is different: that ties directly to administration and is deductible.

Bundled Invoices Need to Be Split

Fiduciaries often receive one invoice covering both deductible administration work and non-deductible services like investment advice. The regulations call these bundled fees and require them to be allocated between the two.²

Any reasonable allocation method works. The regulations point to factors like 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. That makes the allocation straightforward and defensible if the IRS looks at it.

Fees Tied to Selling Estate Property

When the estate sells real estate or other assets and incurs legal fees for title work, closing, or negotiating the sale, those costs generally don’t go on Line 14 as administration expenses. They’re treated as selling expenses that reduce the gain or increase the loss on the sale. Publication 559 notes 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 picks one path: use the selling expenses to offset sale proceeds for income tax, or claim them as administration expenses on Form 706. Not both.⁵

Form 1041 or Form 706

For estates large enough to file a federal estate tax return, the fiduciary has to choose. Attorney fees that qualify as administration expenses can be deducted on the income tax return (Form 1041) or the estate tax return (Form 706), but Section 642(g) prohibits claiming the same expense on both.⁵

To use the deduction on Form 1041, the fiduciary must file a written statement confirming the expense has not been claimed on Form 706 and waiving the right to claim it there later. The statement can go in with the income tax return or separately, as long as it’s filed before the statute of limitations closes for that tax year.⁶ The waiver is permanent. Once filed, that expense cannot be moved back to the estate tax return.

A split is allowed too: part of the legal bill on Form 1041, part on Form 706. Which allocation saves more depends on the estate’s income tax bracket versus its estate tax rate, and whether there’s enough income on the 1041 side to absorb the deduction. Running the numbers both ways before filing usually pays for itself.

Where the Deduction Goes on Form 1041

Deductible attorney fees go on Line 14 of Form 1041, labeled “Attorney, accountant, and return preparer fees.” The line total includes qualifying legal fees plus accounting and tax preparation costs.⁷ For estates that also file Form 706, the waiver statement described above has to accompany or precede the return.⁴

Keep detailed invoices showing what the attorney did, the time spent on each task, and the corresponding charges. When a bill includes bundled services, document how the allocation between deductible and non-deductible portions was calculated. That documentation is what protects the fiduciary if the IRS asks why a particular fee qualified under Section 67(e).

Excess Deductions in the Final Year

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

The fiduciary reports each beneficiary’s share on Schedule K-1 (Form 1041), Box 11. Each deduction keeps its original character:⁷

Section 67(e) expenses (Code A). Attorney fees that passed the “would not have been incurred” test keep their above-the-line status. The beneficiary claims them as an adjustment to income on Schedule 1 (Form 1040), line 24k, and doesn’t have to itemize.⁸
Non-miscellaneous itemized deductions (Code B). These go on the beneficiary’s Schedule A, so the beneficiary has to itemize to use them.⁸
Miscellaneous itemized deductions. Because the suspension under Section 67 is now permanent, any excess in this category gives the beneficiary no benefit.¹

The character-retention rule makes the Section 67(e) classification doubly important. Attorney fees classified as 67(e) expenses give the beneficiary an above-the-line deduction, the most favorable treatment available. Fees that fall into the miscellaneous category are worthless even after they pass through. When the estate’s final-year legal bills are substantial, the classification the fiduciary makes on Form 1041 decides whether those costs produce any tax benefit at all 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