Trust Expenses List: Deductible, Non-Deductible, and Trustee Fees

A trust can deduct expenses that exist only because the property is held in trust — trustee compensation, fiduciary tax return preparation, court and probate costs, appraisals tied to trust administration, and legal fees for interpreting or defending the trust. Expenses an individual owner would also incur, such as investment advisory fees, brokerage commissions, and custodial fees, are now permanently non-deductible. The line between deductible and non-deductible trust expenses is set by Section 67(e) of the Internal Revenue Code, and after Congress made the suspension of miscellaneous itemized deductions permanent in 2025, getting the classification right is more consequential than ever.

One threshold point before the lists. This article addresses non-grantor trusts — irrevocable trusts treated as separate taxpayers that file their own Form 1041. Grantor trusts, including most revocable living trusts, are invisible for income tax purposes; income and deductions flow directly to the grantor’s Form 1040, and none of the rules below apply.¹

Expenses the Trust Can Deduct

Section 67(e) carves out costs that would not have been incurred if the property were held by an individual instead of a trust. These are treated as adjustments in arriving at adjusted gross income, so they reduce taxable income dollar for dollar regardless of the trust’s income level.²

Trustee compensation, including acceptance fees, annual management fees, and distribution fees.
The portion of accounting fees attributable to preparing Form 1041, Schedules K-1, and fiduciary-specific tax calculations.³
Legal fees for construing ambiguous trust provisions, defending the trust against claims, or terminating the trust.
Court costs and filing fees for judicial accountings or other mandated proceedings.
Appraisals needed for fiduciary accounting, distributions, or trust tax compliance.

Fiduciary fees go on Form 1041, Line 12, and other qualifying expenses go on Line 15a.³

Expenses That Produce No Deduction

The Tax Cuts and Jobs Act of 2017 suspended miscellaneous itemized deductions subject to the 2% floor for tax years 2018 through 2025. The One Big Beautiful Bill Act made that suspension permanent by striking the expiration date from the statute.² For 2026 and beyond, these expenses generate zero tax benefit for the trust.

The Supreme Court set the test in Knight v. Commissioner (2008): if a hypothetical individual in a similar position would customarily incur the cost, it belongs in the disallowed category, no matter how necessary it was for the trust.⁴ Under that standard, the following are non-deductible:

Investment advisory and management fees.
Brokerage commissions and custodial fees.
Real estate management fees.
Portions of accounting fees that relate to ordinary income reporting rather than fiduciary-specific work.

Before the permanent suspension these costs were at least partially deductible above the 2% AGI floor. Now they aren’t deductible at all.

Unbundling a Trustee’s Fee

Corporate and professional trustees often charge a single fee that covers fiduciary oversight, beneficiary communications, distribution decisions, and investment management together. Treasury regulations require that these bundled fees be split between the portion unique to trust administration (deductible) and the portion attributable to investment advice (non-deductible).⁵

For fees not billed hourly, only the investment-advice slice is classified as a miscellaneous itemized deduction. Any reasonable allocation method works. The IRS accepts factors like the percentage of trust assets under active management, what a standalone investment adviser would charge for comparable services, and how much of the trustee’s time actually goes toward investment decisions versus beneficiary and distribution work.

This is where many trustees lose deductions they could have kept. A corporate trustee charging 1% of assets under management may devote only a fraction of that fee to investment selection. If the trustee can document that 60% of the work involves beneficiary administration, tax compliance, and distribution planning, then 60% of the fee stays deductible. Requesting a written fee breakdown from a service provider, or keeping contemporaneous time records for an individual trustee, supports the split. Costs billed separately from the bundled fee stand on their own — a separately invoiced legal bill for trust interpretation is fully deductible regardless of how the bundled fee is allocated.

Charitable Contributions

A trust’s charitable deduction works differently from the individual version. Under IRC §642(c), a trust can deduct any amount of gross income paid to a qualifying charity during the year, without the percentage-of-income caps that limit individuals, as long as the trust instrument authorizes charitable distributions.⁶ A trust with the right language can, in theory, zero out its taxable income through charitable giving.

Two conditions matter. The payment must come from gross income, not from principal. And the governing document must specifically permit charitable distributions; if the instrument is silent, the trustee has no authority to give and no deduction is available. Qualifying contributions are reported on Form 1041, Schedule A.

Expenses Tied to Tax-Exempt Income

A trust holding municipal bonds or other tax-exempt investments faces a separate haircut. Under IRC §265, expenses allocable to tax-exempt income cannot be deducted.⁷ If 20% of a trust’s income comes from municipal bond interest, roughly 20% of its otherwise-deductible administrative expenses is disallowed. Trustees must prorate on Form 1041.

The rule reaches even expenses that clearly qualify under §67(e). A trustee fee that is otherwise unique to trust administration still loses deductibility to the extent it’s allocable to tax-exempt income.

Excess Deductions When the Trust Ends

Deductions can exceed income in a trust’s final year. Under IRC §642(h), the excess passes through to the beneficiaries who succeed to the trust’s property, and it keeps its character — a Section 67(e) expense stays above-the-line, and a non-miscellaneous itemized deduction stays itemized.⁸

Beneficiaries can only claim these deductions in the year the trust terminates. Unused amounts cannot be carried forward.⁹ If a trustee has flexibility over when to close a trust, coordinating termination with a year in which beneficiaries can absorb the deduction is worth the effort. Section 67(e) excess deductions land on the beneficiary’s Schedule 1 (Form 1040); non-miscellaneous itemized excess deductions go on Schedule A. Anything that would fall into the miscellaneous itemized bucket produces no benefit for the beneficiary either, because the suspension is now permanent.

Why the Classification Matters So Much

Trusts use compressed brackets. A trust reaches the 37% top federal rate once taxable income exceeds roughly $16,000 in 2026; an individual would need to clear about $626,000 for the same rate. Every deductible dollar is worth far more inside a trust — shaving $5,000 off taxable income can save close to $1,850 in federal tax.

The built-in cushion is minimal. A simple trust required to distribute all income currently gets a $300 exemption; a complex trust that can accumulate income or make charitable contributions gets $100.⁶ Legitimate expense deductions are the primary lever left.

Errors carry teeth. A substantial understatement of tax triggers a 20% accuracy-related penalty; for trusts, the threshold is the greater of 10% of the correct tax or $5,000.¹⁰ With income hitting the top bracket so quickly, a modest misclassification can trip that line.

Documentation should match. For each expense, keep the payee, amount, date, proof of payment, and a description of the service.¹¹ For bundled trustee fees, hold onto the written breakdown or time records that support how the deductible and non-deductible portions were split — that is the record the IRS will ask to see first.

1
Office of the Law Revision Counsel. 26 USC 671 – Trust Income, Deductions, and Credits Attributable to Grantors and Others as Substantial Owners
2
Office of the Law Revision Counsel. 26 USC 67 – 2-Percent Floor on Miscellaneous Itemized Deductions
3
Internal Revenue Service. 2025 Instructions for Form 1041 and Schedules A, B, G, J, and K-1
4
Justia Law. Knight v Commissioner, 552 US 181 (2008)
5
GovInfo. 26 CFR 1.67-4 – Costs Paid or Incurred by Estates or Non-Grantor Trusts
6
Office of the Law Revision Counsel. 26 USC 642 – Special Rules for Credits and Deductions
7
Office of the Law Revision Counsel. 26 USC 265 – Expenses and Interest Relating to Tax-Exempt Income
8
eCFR. 26 CFR 1.642(h)-2 – Excess Deductions on Termination of an Estate or Trust
9
Internal Revenue Service. Instructions for Schedule K-1 (Form 1041) for a Beneficiary Filing Form 1040 or 1040-SR (2025)
10
Internal Revenue Service. Accuracy-Related Penalty
11
Internal Revenue Service. What Kind of Records Should I Keep