Tax Court Rules Payments to Settle Possible Beneficiary's Claims Against Estate are not Deductible for Estate Tax Purposes

Distributions to beneficiaries are not deductible for Federal Estate Tax purposes while claims for estate expenses are deductible.  In Estate of Bates v. Comm'r, T.C. Memo 2012-314 (Tax Ct. 2012), the Tax Court ruled that a decedent's estate could not deduct payments made to a caregiver who was also a named beneficiary under the decedent's instruments.  The Tax Court opined that because the payments were made to settle the right to the caregiver's beneficial interests, rather than claims against the estate, they were therefore non-deductible payments.
This issue of whether a claim by a beneficiary is really a distribution or rather a payment of an expense is a fact sensitive question.  Proper planning and presentation of appropriate evidence is therefore necessary to attempt to succeed to permit the deduction.

Expiring Estate and Gift Tax Laws

Congress appears likely to battle over the estate and gift tax laws that are set to expire (sunset) by the end of this year.  It is quite possible that the status of various estate and gift tax laws may not be known until the final days of 2012 or possibly even into next year.  Keep in mind that if Congress does not act before year end, the following will occur.

Estate tax: The top tax rate goes up to 55% from 35%. A 5% surtax on the wealthiest of estates phases out the benefit of graduated rates.

  The unified credit exemption equivalent goes down to $1 million from $5,120,000.

  The deduction for family-owned businesses pursuant to Code Sec. 2057 is reinstated.

  The credit against state death taxes reverts to its prior credit.

Portability rules. The rules allowing a surviving spouse's estate to use a previously deceased spouse's unused exclusion amount will expire.

Generation skipping transfer (GST) tax. The GST tax is reinstated, with a top rate of 55% from 35%, and the GST exemption amount is set at $1 million (plus inflation adjustment) from $5,120,000.

Gift tax  The top rate increases to 55% from 35%.

Conclusion:  Accordingly opportunities may expire and taxpayers with large estates should be considering ways to utilize these reduced rates and higher exemptions now before they expire for good.