Obtaining Estate Tax Deductions Via Settlement


Oftentimes, parties in litigation will direct property to a spouse or charity in settlement, and seek a marital or charitable deduction. At times, such settlements are motivated by and structured around the estate tax deduction. However, litigants or their counsel oftentimes do not realize that the deductions cannot be created out of whole cloth – there must be a bona fide dispute regarding the entitlement of the spouse or charity to the payment. That is, there must be some reasonable legal basis that entitled the spouse or charity to the settlement payment. That is, if such a payment was not directed for under the dispositive documents (including prior dispositive documents involved in the dispute) or some other binding obligation, parties should expect IRS resistance to deductions for such payments that are “created” in the settlement process.

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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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