Tax Legal Services · Primary-source case analysis

Knight v. Commissioner: Trust Investment Fees Were Subject to the Two-Percent Floor

By Aneeta Mishra and Timothy Chan

Published April 26, 2026 · Updated October 17, 2026

Decision: Knight v. Comm’r, 552 U.S. 181 (2008).

Knight interprets the exception for trust costs that would not have been incurred if property were not held in trust.

A trustee deducted advisory fees in full

For its 2000 tax year, the Rudkin Trust paid Warfield $22,241 for investment advice and deducted it in full. The IRS applied the two-percent floor then governing these expenses. The trustee relied on fiduciary investment duties, but the Court asked whether a comparable individual investor would commonly incur the cost. Knight, 552 U.S. at 185–187, 192–194.

The test asks whether individuals commonly incur the cost

The Court rejected two extremes. The Second Circuit asked whether an individual could incur the cost at all; the trustee asked whether trust duties caused it. Instead, the Court examined whether a hypothetical individual would commonly or customarily incur the cost. It affirmed the result for different reasons from the appellate court. Knight, 552 U.S. at 187–192.

Investment advice was commonly obtained outside trusts

The record did not show that Warfield charged extra for fiduciary accounts or treated this trust differently from an individual with similar objectives. The Court allowed for a different result for a special additional fiduciary charge, or an incremental cost tied to unusually distinctive investment objectives or competing interests. It did not find such a cost here. Ask the adviser to identify the service and additional amount rather than merely relabeling routine advice as a trust expense. Knight, 552 U.S. at 194–195.

Disposition

The Court unanimously affirmed on January 16, 2008. Its treatment of the trust’s 2000 fees is historical. The current section 67(e) and (h) must be read together: Qualifying estate or trust administration costs receive the specified adjusted-gross-income treatment, while the post-2017 disallowance of miscellaneous itemized deductions no longer has the former 2025 end date. Do not assume the old two-percent calculation has resumed for 2026. Classify the actual service and applicable tax year before calculating a deduction.

Key takeaways

• Identify the tax year and current treatment of miscellaneous deductions.
• Ask whether individuals commonly incur the same cost.
• Separate any incremental trust-specific portion.
• Document fiduciary needs and fee allocation.