ACCT 5315 - Estate and Gift Taxation

Estate deductions, elections
and payments of tax
Chapters 18-30
Funeral and Admin Expenses
Funeral Expenses and expenses incurred in
administering property subject to claims are reported
on Schedule J
Expenses related to property not subject to claims
are reported on Schedule L.
Funeral - actual amounts expended by executor or
administrator. Must be payable out of estate.
Funeral expenses must be reduced by any SS or VA death
Funeral expenses must be reduced by reimbursed amounts
from wrongful death actions
If state law requires funeral expenses to be born by the
decedent’s spouse, no funeral expenses are allowed.
If funeral expenses are considered part of the community
estate, only 50% of the expenses are a deduction.
Administration Expenses
(Limited to actual/necessary exp)
These include expenses for
collection of assets, payment of debts, distribution among
the persons entitled to share in the estate.
E.G., executors commissions, attorney’s fees, and misc.
Executor’s fees - best if fee set by probate court
Generally actual amount paid or to be paid will be allowed.
Reasonableness is key, with similar estates used as
Local law may reduce the amount specified by will to the
Attorney’s fees - actually paid/will be paid for benefit
of the estate. Unpaid amounts may be contested at
final audit. Additional fees for litigation allowed at
time of litigation.
Administration Expenses
Miscellaneous Expenses
Includes court costs, surrogate’s fees, appraisers, clerk hire,
costs for storing or maintaining estate property and other
expenses necessary to the preservation and distribution of
the estate.
Selling expenses - allowed if sale necessary to pay
decedents debts, admin expenses or taxes, to
preserve the estate or to effect distribution.
Interest on loans to pay estate taxes and to prevent
forced sales - deductible as admin expenses.
Interest on deferred Federal and State death taxes
are deductible when accrued
Community prop. sates - if admin expenses are
considered community property - 50% ded.
Estate v. Income Tax
Sec. 2053 and 2054 deductions can be claimed either
on the estate return or the fiduciary income tax
Double deduction prohibition also applies to expenses
or losses that are paid/incurred by trusts or other
persons, instead of the estate.
Expenses subject to provisions - executors’ fees,
attorney’s fees, court costs, appraisal fees, custodial
fees, investment counsel, accountants, etc.
Rule does not apply to deductions for taxes, interest,
business expenses and other accrued expenses
Waiver required to be filed if income tax treatment
Debts of Decedent
Claims allowable by law deductible to extent of the
value of property subject to these claims.
Deductible claims - personal obligations of the
decedent existing at time of death. Only claims
enforceable against the estate are deductible.
Amount of deduction is the value of the claim.
See page 173 for examples of deductible claims.
Medical expenses - from last illness are deductible
Claims on Founded on promise/agreement - only
deductible if contracted in good faith. Divorce decree
obligations fully deductible.
Federal Estate taxes are not deductible - state
inheritance/estate taxes can be deducted.
Property taxes are deductible only if they accrue
under state law prior to decedent’s death.
Excise taxes are deductible on sales if the sales are
used to pay the decedent’s debts, taxes, or expense
or admin or to preserve the estate or effect
Unpaid income taxes - deductible if on income prior
to decedent’s death.
Interest on contested gift tax liabilities and federal
and state income tax deficiencies is deductible as
admin expenses based on state law.
Mortgages and Liens / Net Losses / Expenses
for Property Not Subject To Claims
Mortgages that are charges against the estate of the
decedent and date from before decedents death
reduce taxable estate. If mortgage subject to all
estate show on Sch. K, if subject to specific property
only - show net on property schedule.
Casualty and Theft losses that occur during
settlement of the estate are deductible if not
compensated by insurance.
Depreciation of intangibles not deductible but can impact
AVD / Casualty losses not deductible if claimed on I/T return
Admin expenses of property not subject to claims are
allowed if the expenses would have been deductible
if the property was subject to claims / paid w/in 3
years after
Marital Deduction
Spouse must be U.S. Citizen to qualify for deduction
Property subject to deduction must be included in GE
Schedule M used to report marital deduction property
Amount of Deduction - unlimited unless an executed
trust dated pre 1982 contains the old maximum
marital deduction formula
All non-terminable interest property qualifies for MD.
Terminable interests may not qualify:a terminal
interest in property is one that will terminate or fail
on the lapse of time or on the occurrence of some
event or contingency.
Special rules exist for terminable interest property
Qualified Terminable Interest
Terminable interest property generally does not
qualify for the marital deduction except for QTIPs.
If QTIP - entire property subject to such life interest
is treated as passing to spouse and qualifying for MD.
QTIP: property passing from the decedent to a
spouse who is entitled to all or part of the income
from the property for life payable at least annually
a.k.a. - qualifying income interest - distributions from
IRA can be QTIP if structured properly.
No person (spouse included) can have the power to
appoint any part of the QTIP to any person other
than the spouse during the spouses life.
QTIP - continued
If QTIP is for only a portion of the income, must be
stated in fractional or percentage terms.
Income interests that terminate if spouse remarries
are not QTIP.
Annuities qualify if SS has a qualifying income
interest for life
annuities not QTIP if any person other than spouse is
entitled to receive, during SS’s life, any distribution from the
annuity fund.
QTIP election made on Schedule M by executor and
is irrevocable.
Generally contingent income interests are not QTIP,
except if contingency is a function of electing QTIP
on 706.
QTIP - continued
Tax on transfer of QTIP property 
if transferred during life of spouse - gift tax on the FMV of
property at date of gift less any amount received by spouse
if transferred at death - includible in GE on Schedule F and
proper response should be answered on page 3 of form 706.
Split gifts to spouse and charity are allowed and QTIP
provisions are preserved
Charitable deduction allowed for value of remainder interest
Marital deduction allowed for value of the annuity or unitrust interest.
Surviving Spouse / Life Estate
or Other Terminable Interests
Person receiving marital deduction property must
qualify as Surviving Spouse on DOD of decedent.
(Legal separation is OK, divorce is not)
Terminable interests - life estates, annuities, patents,
and copyrights. Bonds, notes or other contracts are
not terminable interests - TIs determined by state
Nondeductible Terminable interests - see
requirements on page 194.
Terminable interest rules are designed to prevent the
allowance of a marital deduction with respect to
property which, by terms of the transfer is likely to
escape inclusion in the gross estate of the surviving
Widows Allowances / Dower
and Courtesy
Support allowance during estate settlement deductible
Marital deduction can be obtained for any portion of
property obtained by operation of law or of the will.
Deductibility of widow allowances after estate
settlement is dependent on state statute authorizing
the supp. Pymts.
If vested (I.e., survives death or remarriage) qualifies for
MD / If not vested, non-deductible.
Nature of widow’s interest is determined as of decedents
Dower/Courtesy follows same state rules as widows
allowances based on vesting aspects.
Life Insurance and Annuities
Proceeds if accompanied with GPOA may qualify for
Proceeds must be payable in installments or held by the
insurer subject to an agreement to pay interest.
The SS alone must have the right to receive all or a specific
poriton of the payments to be made during his/her lifetime.
Distributions must be made at least annually w/ first
payment not more than 13 months after decedent’s death.
SS must have power to appoint the entire amount available
to her.
The power must be in favor of that person or that person’s
No other powers may exist to appoint to anyone other than
the SS
Power must be exercisable in all events.
Valuation of Marital Property
Net interest received is considered (I.e., net of
mortgages, liens, etc.) for MD
Marital deduction is allowable only to the extent that
property bequeathed to the SS exceeds in value the
property such spouse is required to relinquish.
Value of marital deduction must be reduced by death
taxes that the executor is authorized by will to pay
out of the marital trust even if not paid from the
marital trust.
If will is silent as to which assets should be used to
pay estate and death taxes, state laws will determine
whether marital property is used.
Other Issues
Qualified disclaimer can be made by third party to
increase property transferred to spouse which is avail
for MD
AVD election is basically the same for marital
deduction property - AVD does not apply to assets
that change in value simply from the passage of
time, etc.
Terminable interests are not included on Schedule M.
No double deduction is allowed - if mortgages
deducted on another schedule, net value is deducted
on marital deduction schedule.
Values listed on Schedule M must be reduced by the
amount of federal estate tax and other taxes payable
out of the assets transferred.
Charitable deduction is allowed for property
transferred by the decedent to or for the use of
certain charities - see list on page 211
Transfers to individual members of religious order are
not allowed as charitable deductions.
Charitable deduction is only allowed if made by the
decedent not the estate or beneficiaries
Transfer can be testamentary
Qualified disclaimers by third parties to benefit a charity can
be used for the charitable deduction.
See IRS Pub 78 to determine qualified charities.
State laws also play a role in determining if a
charitable transfer occurred.
Charity - continued
Property passing under POA to charity qualify as
charitable transfers.
Transfers - not exclusively for charity - portion of
payment attributable to charity that is ascertainable
and severable from charitable interest is deductible.
See list on page 210 for items transferred for other
than exclusively charitable purposes that are
A deductible charitable remainder interest must be in
the form of an annuity trust (CRAT), a unitrust
(CRUT) or a pooled income fund
Valuation of Charitable
Estate can claim a charitable deduction for the PV of
income and remainder interests in property that is
bequeathed or otherwise passes to qualifying
FMV of an annuity, life estate, term for years,
remainder, reversion or unitrust interest is its PV
Rules for valuing transfers not exclusively for
charitable purposes - guaranteed annuity trusts,
pooled income funds etc - are determined using the
respective provisions of Reg., 1.642, 1.664 or
Contingent gifts not deductible unless chance that
the charity will not receive the property is negligible.
Transfers out of which death
taxes must be paid.
Deductions limited to amount actually received by the
charity - applicable when residual estate is left to the
charity and taxes and other expenses must be paid
from residuary.
Controversy exists as to how the marital and
charitable deductions should be reduced for
administration expenses.
IRS Pub 904 contains examples for computing the
charitable and marital deductions when these
deductions are interrelated with Federal estate taxes.
Miscellaneous Issues Charitable Deductions
Deductions for charity - Schedule O. If transfer by
will, copy of the will must be attached.
If residuary estate transferred to charity - statement
showing how deduction is computed.
Alternate valuation:
even if elected, any charitable transfer deductible should be
valued at DOD
Adjustments must be made for any difference in the value of
the property six months after the decedents death or at the
date of sale or exchange during the six month period.
If percentage of estate given and AVD elected, used the
AVD to determine.
Credit for tax on prior
What is the purpose of this credit?
Is there a phase out to this credit? If so how does it
Credit is computed on Schedule Q of form 706
Credit is allowed against the estate for all or part of
the estate tax paid with respect to the transfer of
property to the present decedent by or from a person
who died within 10 years before or within two years
after the decedent.
Credit cannot be larger than it would have been if the
present decedent had not received the property
Requirement for this Credit
Transferee - current decedent
Property received by transferor’s estate does not
have to exist in the estate at DOD to receive credit.
Property received does not have to be traced either.
Key issue is whether the property was subject to
taxation in the transferors estate 
Do spouses often get to take advantage of this credit?
Credit is allowed for property received by current
decedent from former decedent to which a GPOA was
held as long as the property was included in former’s
Gross Estate.
Amount of the credit
Credit is limited to smaller of
amount of the estate tax of the transferor’s estate relative to
the tranferred property
Incremental difference in estate tax that occurred because
the property was included in the transferee’s gross estate.
Percentage reduction occurs if prior decedent died more
than 2 years before current decedent.
Formula - see page 253
Form 706 provides worksheets on how to calculate
Credit is again shown on Schedule Q.
When is this credit likely to occur?
Valuation of property subject
to Prior Transfers Credit
Value for formula - value at which included in
transferors gross estate.
Interest received must be able to be valued under
recognized valuation principles in order to claim the
Value is reduced by
any liens or encumbrances on the property assumed by
amount of death taxes which the transferee might have
been required to pay
any marital deduction that might have been allowed.
If charitable deduction allowed for the property
transferred, the deduction must be reduced if the
credit is allowed.
Gift Tax Credit / Foreign
Death Tax Credits
Credit allowed for gift tax paid on pre 1977 gifts that
are included in the gross estate.
Foreign death tax credit is similar to foreign tax
credit. Why do such credits exist?
Credit applies if a foreign country taxes property at
death and the property is included in decedent’s
gross estate.
Credit must be claimed within 4 years after filing the
Miscellaneous Foreign Death
Tax Issues
Treaty is integral in determining both tax and amount
of credit.
If multiple countries, a separate computation of the
credit must be made with respect to each foreign
total amount of credit allowable is limited to the amount of
the estate tax attributable to such property.
Situs will control whether the credit is allowed for
foreign death taxes.
Schedule P is used to report and compute credit.
Computation of Tax
Compute decedents taxable estate
Compute adjusted taxable gifts (post 1976 gifts) that
are not included in gross estate.
Combine taxable estate and adjusted taxable gifts to
arrive at estate tax base
Compute tentative tax
Subtract total gift taxes paid (cash outlay) on post 76
Subtract credits - unified credit, state death taxes,
foreign death taxes, and any other credits.
Result is tax due.
Miscellaneous rules
Members of armed forces - special exemption exist
for members of the armed forces that are killed in
Nonresident non-citizens - file form 706NA and must
file if they have property in the United States
Amounts included in gross estate are the same as
those that would be included in U.S. estates.
Payment of the Tax
Date of payment - due date of return - 9 mos after
Extension available but do not avoid interest
Estate tax on Closely held businesses or farms
Must comprise 35% of decedents gross estate
Can pay over 14 years, 4 years just interest, 10 years
interest & tax
2% interest rate applies to first $1 million in farm value
Holding company stock can qualify/passive do not
Attribution rules can be used to meet 35% test rules
See list on page 296 for acceleration of unpaid taxes.