|February 1, 2013|
Previously published on January 2013
In Estate of Sylvia E. Bates (2012), the Tax Court rejected an estate’s attempt to deduct a settlement payment to the decedent’s caregiver as an estate administration expense on the estate tax return. In a trust prepared by the decedent, she left $100,000 to the person who had been her caregiver. She subsequently amended her trust to name him as trustee and give him a greater amount. After the decedent died, her children commenced litigation over whether the gift to the caregiver was void under a provision contained in the California Probate Code designed to prevent caregivers from exercising undue influence over their clients. The litigation was settled by the trust agreeing to pay the caregiver $575,000.
On the federal estate tax return, the estate deducted as an administration expense the $475,000 it paid to the caregiver that was in excess of the $100,000 that the decedent had left to him in her original trust. It also deducted $23,113 of life insurance proceeds the caregiver received on the decedent’s life. The IRS disallowed the deduction on the grounds that the caregiver was a beneficiary of the trust, and payments made to beneficiaries are not deductible. The court agreed with the IRS and also rejected the estate’s claim that the payment was a deductible administration expense. The court said there is no authority that holds that a payment to a named beneficiary can be considered an administration expense of the estate.
A post-death settlement with a decedent’s caregiver requires a carefully drafted settlement agreement in which the amount paid is stated to be in settlement of a labor claim brought by the caregiver rather than a settlement of any rights the caregiver may have as a beneficiary.