Do Fiduciary Fees Need to be Claimed on Federal Taxes?

Fiduciary fees are claimed as ordinary income.
i Duncan Smith/Photodisc/Getty Images

A fiduciary is a person in a position of trust in the management of money. Often, fiduciary fees are charged by the executor or trustee of an estate. These roles may be filled by a family friend or relative. At other times, particularly with larger estates, the fiduciary roles are filled by an institution -- a trust company or the trust department of a bank. Fiduciary fees collected from an estate or from any other source must be claimed as income for tax purposes.

Fiduciary Fees Are Income

The taxability of fees earned by fiduciaries is covered in Internal Revenue Service Publication 559, "Survivors, Executors and Administrators," which states that personal representatives must claim as income any fees they're paid from an estate. This publication instructs nonprofessional fiduciaries, such as a friend or relative of the deceased, to report fiduciary fees on IRS Form 1040 on line 21. Professional fiduciaries should report fiduciary income as self-employment income, using Schedule C or Schedule C-EZ of Form 1040.

When the Estate Is a Business

The IRS makes one exception to the general requirement that nonprofessional fiduciaries report fees on IRS Form 1040, line 21. Whether you are a professional or nonprofessional fiduciary, if the estate you're handling has an ongoing business and you participate in its management or operation in the course of your fiduciary duties, the IRS directs you to report any fees you receive as self-employment income. In all cases, no matter how you report it, the fees earned are taxed as ordinary income.

Timing of Fiduciary Income Filings

In the course of managing an estate, a fiduciary must also file a return, the "fiduciary income tax return," on behalf of the estate. This return covers the period from the date of the decedent's death until the closing of the estate. If it takes two years or more to close the estate, estimated taxes must be paid in the interim. Ordinarily, a fiduciary only declares income and pays taxes on fees when they are collected from the estate. If the estate pays estimated taxes in the interim, however, the fiduciary collects fees to the date of filing and declares them with other estimated taxes or on the fiduciary's next annual income tax return.

Complications of the Fiduciary Return

Some aspects of the fiduciary return will often require professional advice. If you are acting as fiduciary for the estate and the IRS concludes you have been negligent in determining and paying the tax obligation, you can be held personally liable for the estate's taxes. Some tax liabilities are the responsibility of the estate's beneficiaries, but if they determine you have not acted in their best interests, which is your legal fiduciary obligation, the beneficiaries can hold you liable. If the estate is large or its operation is complex, it makes sense to employ a tax professional early in your management of the estate. Tax professionals' fees can be paid out of the estate. These fees and your own fiduciary fees become tax-deductible estate expenses on the closing fiduciary return or when estimated taxes are reported.

the nest