Generally speaking, legal fees are tax deductible when the fees are incurred for the purpose of gaining or producing income from a business or property and are not outlays of a capital nature e.g. associated with the sale of capital property such as a sale of a building or shares in a corporation. More often than not the fees associated with the settlement of an estate are not tax deductible since such fees incurred are not in connection with the earning of income from a business or property.
Let’s say, the estate was legally entitled to receive income from a property outside of the estate’s control and you as trustee needed to take legal action to enforce that right. The legal fees associated with the legal action may be deductible for tax purposes. Assume for instance a scenario where the estate you are managing is a shareholder of a corporation, say ABX Inc. and it is managed by 3rd party trustees. These trustees are refusing to pay dividends to which the estate would normally be entitled. You as trustee of the estate may decide to take legal action against ABX to secure payment of the dividends. The legal fees associated with the action may be deductible for tax purposes, as long you can demonstrate a direct connection between the incurrence of legal fees with the securing of the dividends from ABX.
Look for opportunities to ease the pain of legal fees by making them tax deductible.
Until the next time.