Estate Tax Deductions

Pursuant to Internal Revenue Code section 2053(a), “the value of the taxable estate shall be determined by deducting from the value of the gross estate such amounts: (1) For funeral expenses, (2) for administration expenses, (3) for claims against the estate, and (4) for unpaid mortgages on, or any indebtedness in respect of, property where the value of the decedent’s interest therein, undiminished by such mortgage or indebtedness, is included in the value of the gross estate, as are allowable by the laws of the jurisdiction, whether within or without the United States, under which the estate is being administered.”

The amount an estate may deduct for claims against the estate has been a highly litigious issue. The lack of consistency in the case law has resulted in different estate tax treatment of estates that are similarly situated, depending only upon the jurisdiction in which the executor resides. The Treasury Department and the IRS believe that similarly-situated estates should be treated consistently by having Code section 2053(a)(3) construed and applied in the same way in all jurisdictions.

The Internal Revenue Service issued final regulations relating to the amount deductible from a decedent’s gross estate for claims against the estate under Code section 2053(a)(3). In addition, the regulations update the provisions relating to the deduction for certain state death taxes to reflect the statutory amendments made in 2001 to Code sections 2053(d) and 2058. The regulations primarily will affect estates of decedents against which there are claims outstanding at the time of the decedent’s death.