Is the Cost of Setting Up a Trust Tax Deductible?

The cost of setting up a trust is generally not tax deductible. The IRS treats attorney fees for drafting the trust agreement, initial estate planning consultations, and the paperwork to transfer assets into the trust as personal expenses, the same way it treats other estate planning costs. Some ongoing costs of running a trust after it exists can still be deducted, but only a narrow category qualifies, and a permanent change to the tax code has made that category narrower than it used to be.

Why Setup Costs Don’t Qualify

The deduction rule that people hope will cover trust setup is Section 212 of the Internal Revenue Code, which allows a deduction for ordinary and necessary expenses paid to produce or collect income, or to manage property held for the production of income.¹ Creating a trust doesn’t fit. The reason you set up a trust is to organize your estate, control how assets pass to beneficiaries, or shield assets from creditors. Those are personal goals.

The IRS regulations reinforce the point: an expense qualifies under Section 212 only when it directly relates to income that will appear on your federal return, not merely because it involves property that could someday produce income.² So the attorney fees to draft your trust document, the consulting time to decide what kind of trust to create, and the deeds and assignment paperwork to fund it are all personal costs. Even if the trust will eventually hold rental property or an investment portfolio, the act of creating the trust is a personal decision, not an income-producing activity.

What You Can Deduct Once the Trust Is Running

Ongoing administration is different. Section 67(e) of the Internal Revenue Code lets a trust deduct costs that “would not have been incurred if the property were not held in such trust.”³ The test is whether the expense is unique to operating a trust. If an individual without a trust could pay for the same thing, it fails.

Expenses that pass the test and remain fully deductible include:

Fees for preparing the trust’s Form 1041 and the beneficiary Schedule K-1 forms, because individuals don’t file fiduciary returns.⁴
Trustee compensation for legally mandated fiduciary tasks: distribution accounting, beneficiary notifications, and complying with the terms of the trust instrument.
Legal fees for judicial accountings, court-supervised trust modification proceedings, and defending the trustee’s actions in a fiduciary capacity.

Investment advisory fees, general financial planning, and tax advice that isn’t specific to the trust’s fiduciary obligations all fail the test. A trustee who manages a stock portfolio is doing something any individual investor could do, so the investment management portion of a trustee’s fee is not unique to trust ownership.

What the Law Change Took Away

Before 2018, expenses that fell outside Section 67(e) could still be claimed as miscellaneous itemized deductions subject to a 2% floor on adjusted gross income. That option is gone. The Tax Cuts and Jobs Act suspended those deductions starting in 2018, and later federal legislation made the elimination permanent for all tax years beginning after December 31, 2017.³

The biggest casualty is investment advisory fees. Whether the trust pays an advisor to manage stocks, bonds, or a real estate fund, those fees no longer reduce taxable income at all. The same is true of general tax planning advice, financial planning services, and any other cost that an individual investor could incur.

The Section 67(e) exception still stands. Costs unique to trust administration are treated as above-the-line deductions in computing the trust’s adjusted gross income, which puts them outside the class of expenses that got eliminated.³

Bundled Fees Have to Be Split

Trustees and professionals rarely perform only fiduciary work or only investment work. When a trust pays a single bundled fee covering both, the fee has to be allocated between the deductible fiduciary portion and the nondeductible investment portion.⁵ The IRS doesn’t prescribe a formula. Any reasonable method works, but you have to be able to defend it.

If the bundled fee is not computed on an hourly basis, only the portion attributable to investment advice falls on the nondeductible side. Reasonable factors for the split include the percentage of the trust’s assets subject to investment advice, what a third-party advisor would charge for comparable advisory services alone, and how much of the trustee’s time goes to investment management versus beneficiary dealings and distribution decisions.⁵ Out-of-pocket expenses billed separately from the bundled fee are evaluated on their own.

Under the current rules, that allocation matters more than it used to. Before 2018, both halves of a split fee could produce some tax benefit. Now, only the fiduciary-specific portion does anything at all. If your trustee’s fee is a 60/40 split between investment management and fiduciary duties, only the 40% is deductible.

Who Actually Claims the Deduction

Whether a deductible trust expense shows up on your personal return or on the trust’s own return depends on the type of trust.

Grantor Trusts

A grantor trust is one where you, as the creator, retain enough control that the IRS treats you as the owner of the trust’s assets for income tax purposes. Every revocable living trust falls into this category automatically.⁶ The trust doesn’t file its own return; its income, deductions, and credits flow through to your Form 1040.⁴ Deductible trust expenses are subject to the same limits that apply to individual taxpayers, including the permanent elimination of miscellaneous itemized deductions.

Non-Grantor Trusts

A non-grantor trust is a separate taxable entity. It files Form 1041 and claims deductible administration expenses directly against its own income.⁷ Those deductions matter more than they might for an individual because of how quickly trusts hit the top bracket. For 2026, a non-grantor trust reaches the 37% rate on income above just $16,000,⁸ while a single individual doesn’t get there until income exceeds $640,600.⁹ Every dollar of legitimate deduction shaves off tax at the highest marginal rate for all but the smallest trusts.

Keep the Paperwork That Backs the Deduction

The burden of proving that a trust expense qualifies falls on the trust, not the IRS. Invoices that lump everything under “trust services” invite the IRS to disallow the entire amount. Ask attorneys, accountants, and trustees who bill the trust to itemize their time by category: fiduciary administration, investment management, beneficiary communications, tax return preparation, and so on.

If the IRS decides a trust improperly deducted nonqualifying expenses, the resulting shortfall carries a 20% accuracy-related penalty on top of the tax and interest.¹⁰ Given the compressed trust brackets, even a modest disallowance can produce an outsized bill. Detailed billing records and a documented allocation method are the cheapest way to avoid that outcome.

1
Office of the Law Revision Counsel. 26 USC 212 – Expenses for Production of Income
2
eCFR. 26 CFR 1.212-1 – Nontrade or Nonbusiness Expenses
3
Office of the Law Revision Counsel. 26 USC 67 – 2-Percent Floor on Miscellaneous Itemized Deductions
4
Internal Revenue Service. Instructions for Form 1041 and Schedules A, B, G, J, and K-1 (2025)
5
eCFR. 26 CFR 1.67-4 – Costs Paid or Incurred by Estates or Non-Grantor Trusts
6
Internal Revenue Service. Abusive Trust Tax Evasion Schemes – Questions and Answers
7
Internal Revenue Service. About Form 1041, U.S. Income Tax Return for Estates and Trusts
8
Internal Revenue Service. 2026 Tax Rate Schedule
9
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
10
Internal Revenue Service. Accuracy-Related Penalty