Claims Based On Testamentary Intent Are Not Deductible Under Section 2053 For Estate Tax Purposes

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Code 2053(a)(3) allows an estate to deduct claims that are paid in calculating estate taxes. Oftentimes, estate litigation involves disputed claims. Are the payment of those claims deductible?

They can be, but not if the payment is attributable to the testator’s testamentary intent. This was illustrated in a recent Tax Court case.

In the case, a caretaker of the decedent was a $100,000 pecuniary beneficiary under the decedent’s first set of trust documents. Under a second set of documents, the caretaker became a testamentary trust beneficiary. When the decedent died, litigation ensued between the caretaker and members of the decedent’s family. The parties settled, and the caretaker was paid $575,000.

The estate treated the first $100,000 as a bequest to the caretaker. They then sought to deduct the remaining payment as a deductible claim under Code §2053(a)(3).

Not so fast, said the Tax Court. A requirement for deductibility is that the claim is based on adequate consideration. The Court found that the caretaker had been fully paid for his lifetime services, and thus there was no consideration given to the deceased for the payment to him – also, no claim for unpaid compensation had been filed. Further, per the caretaker being a named beneficiary in both the first and second trust documents, it was clear that the payment was in settlement and a substitute for the gifts provided in the trust documents. As such, the payments were attributable to the decedent’s testamentary intent, and thus not deductible.

The estate also sought deductibility under Code §2053(a)(3) per the payment being made to “preserve estate assets.” The Tax Court determined that such grounds did not apply when the payment is attributable to testamentary intent.

Estate of Sylvia E. Bates, TC Memo 2012-314


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Charles (Chuck) Rubin, Gutter Chaves Josepher Rubin Forman Fleisher P.A. | Attorney Advertising

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