Section 2053 - Final Regulations on Claims Against Estate: "You have to Pay to Play"

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By Deborah Hildebran-Bachofen and John R. Cella, Jr., Partners of Manning Fulton & Skinner, P.A.

It is well-established that the executor must devote sufficient estate assets to meet the estate’s liabilities. Amounts used to satisfy such liabilities do not flow to the decedent’s beneficiaries. The Internal Revenue Code (“Code”) contains several deductions from the gross estate that operate to lower the taxable estate. Code section 2053 and the corresponding Treasury Regulations govern the deductibility of certain estate expenses, claims, and unpaid mortgages. Section 2053(a)(3) specifically allows a deduction from the gross estate value of “such amounts . . . for claims against the estate.” Over time the courts, the Department of the Treasury (“Treasury”), and practitioners have struggled with the extent to which the value of such claims should reflect only the facts as of the decedent’s date of death or should consider post-death facts relating to the claims. Some Code sections expressly require a date of death valuation, but as Treasury has indicated repeatedly, nothing in section 2053(a) has ever required the valuation of a deductible claim as of the date of death. Accordingly, before Treasury’s guidance in this area, determining the value of claims was especially difficult and based largely on the available information. Practitioners prepared estate tax returns based on a snapshot of the decedent’s assets and liabilities as of the date of death, including all accruals and contingencies.

Issued on April 23, 2007, the proposed regulations under section 2053, 72 Fed. Reg. 20080, dramatically changed the reporting of claims against the estate on the decedent’s estate tax return by denying a deduction for any liability not actually paid before filing the estate tax return. Practitioners submitted comments on the proposed regulations; thereafter, Treasury issued final regulations on Oct. 20, 2009, 74 Fed. Reg. 53652.

The final regulations fix some, but not all, the issues raised by the proposed regulations. In several respects the final regulations are helpful to estate tax return preparers, especially those dealing with smaller claims against the estate. However, some issues raised in the comments by organizations and practitioners remain unaddressed and will continue to challenge executors and return preparers until Treasury issues further guidance.

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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.

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