Estate tax deductions for claims against the estate: IRS proposes new regulations

Failing to properly coordinate how a claim against an estate is administered in the probate proceeding with how the claim is reported to the IRS for estate-tax deduction purposes can be a multimillion dollar mistake (see here).

In order to get this process right certainty as to what the applicable tax rules are is key.  Which is why the latest action by the IRS on this front should be helpful.  As reported here by Joel A. Schoenmeyer in the Death and Taxes Blog, the IRS is proposing amendments to the regulations relating to the amount deductible from a decedent’s gross estate for claims against the estate (see here). 

In its "background" explanation to the proposed rule amendment, the IRS cited the need for greater uniformity amongst the courts as the primary reason for the proposed rule change.  Here’s an excerpt:

The amount an estate may deduct for claims against the estate has been a highly litigious issue. Unlike section 2031, section 2053(a) does not contain a specific directive to value a deductible claim at its date of death value. Section 2053, in fact, specifically contemplates expenses such as funeral and administration expenses, which are only determinable after the decedent’s date of death. Although numerous courts have addressed section 2053(a)(3), there is little or no consistency among the conclusions of those courts with regard to the extent (if any) to which post-death events are to be considered in valuing such claims.

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After carefully considering the numerous judicial decisions and the analysis and conclusion in each, the legislative history of section 2053 and its predecessors, and the various possible alternatives, and in order to further the goal of the effective and fair administration of the tax laws, the proposed regulations adopt rules based on the premise that an estate may deduct under section 2053(a)(3) only amounts actually paid in settlement of claims against the estate. If the resolution of a contested or contingent claim cannot be reached prior to the expiration of the period of limitations for claims for refund, the estate may file a protective claim for refund to preserve its right to claim a deduction under section 2053(a).