Section 2053 Final Regulations: Continued Uncertainty?

The Treasury Department issued new regulations for deducting expenses and debts when someone dies. The rules say that you can only deduct these expenses if they have been actually paid. If you owe money to someone, you have to pay it before filing the tax return. There are a few exceptions to this rule, like if the amount owed is easy to figure out, if it’s $500,000 or less, or if it’s related to the person’s things they left behind. If you can reasonably figure out how much money you owe or need to pay, you can deduct it from your taxes. But if it’s not certain or you’re still arguing about it, you can’t deduct it. This also applies to regular payments that you have to make, like if you’re paying someone regularly but the amount could change because of something like getting married again. In those cases, you can use life expectancy tables to figure out the value of those payments, and the IRS can help with the remarriage part. The proposed regulations originally only allowed deductions for the present value of noncontingent obligations, but later changed to allow full deductions for contingent claims. Personal representatives can also buy an annuity to satisfy recurring obligations and deduct the cost. There’s a special rule for deducting claims totaling $500,000 or less, but it’s not as simple as it seems. When someone dies, their estate may have claims or lawsuits against it. In some cases, the estate can deduct the value of these claims from the total value of the estate, which can lower the amount of taxes owed. However, there are strict rules about when and how this can be done. The rules require the estate to get a professional appraiser to determine the value of the claims, and the value of the claims must be significant compared to the total value of the estate. This can make it difficult for smaller claims to qualify for this deduction. Additionally, the IRS can make it even harder by challenging the appraiser’s qualifications. This can make it complicated and expensive for the estate to take advantage of this deduction. If someone who has died owes money or has expenses that are hard to figure out, the person in charge of their affairs can file a protective claim for a refund. This means they can file a claim without knowing the exact amount and explain why it’s hard to figure out. The IRS will review the claim and consider giving a refund once the issue is resolved. But if the claim is for money owed to family members, there are more rules to show that it’s a real debt and not just a gift. In order for a claim or expense to be deducted from a deceased person’s estate, it must be a legitimate and reasonable expense. This means it should be a normal business transaction, not related to inheritance, and have proper evidence and documentation. The regulations also provide rules for deducting expenses approved by a court or settled in a negotiation between disagreeing parties. However, a settlement for a claim that cannot be enforced cannot be deducted. If a claim against someone’s estate can’t be enforced, it can’t be deducted as a tax expense, even if it’s paid. This includes claims that are too old to be enforced and fees that are higher than the law allows. But if a claim is being fought in court and the estate might have to pay, that can be deducted once the case is settled. Personal representatives don’t have to report deductions that aren’t fully paid, and they can only deduct payments made for settled claims within a certain time frame. The IRS will adjust deductions if the estate gets money back later on. When someone dies, their estate may have expenses and claims that can be deducted for tax purposes. However, there are certain rules and exceptions that need to be followed. If the estate expects to be reimbursed by insurance or other parties, those payments cannot be deducted unless it’s certain that only a partial reimbursement can be collected. If the personal representative didn’t know and couldn’t have reasonably known about the potential reimbursement, they can certify this to the IRS. In some cases, they can make a full deduction of a claim with potential reimbursement if the effort to collect the reimbursement would be too burdensome. For claims or expenses that will be paid from a bequest, they can be deducted in full for marital and charitable bequests. The new regulations may result in more estates being kept open, and while the IRS has provided some guidance, there are still unclear issues that need further explanation. The text contains references to legal documents and regulations related to estate taxes and deductions. It also includes an example of a situation where a family member provides services to a deceased person and seeks payment from the estate. These are references to specific tax regulations and court cases related to estate planning. Robert L. Spallina and Lauren A. Galvani are attorneys who specialize in helping wealthy families plan how to transfer their assets. They have extensive education and experience in tax law and estate planning. This information is provided by the Tax Section of the Florida Bar.

Source: https://www.floridabar.org/the-florida-bar-journal/section-2053-final-regulations-continued-uncertainty/