- Estate of Bates v. Commissioner, T.C. Memo. 2012-314, November 7, 2012
- December 12, 2012
- Law Firm: Proskauer Rose LLP - New York Office
The Tax Court ruled that the cost of settlement could not be deducted as an administrative expense on an estate tax return, because the claim was for a beneficiary's distributive share and not for a creditor's claim against the estate.
In 1998, the decedent, a resident of California, executed a will which provided that her granddaughter would serve as executor. It also provided that estate assets would be used to pay expenses and any remaining assets would fund a family trust. The family trust provided, among other things, that the decedent's granddaughter would serve as trustee and that the trust property would be distributed evenly among decedent's three grandchildren. It also provided for a bequest to the decedent's caretaker.
In 2005, after being diagnosed with Alzheimer's, the decedent executed a new will and amended and restated her trust. The new will and trust provided that her caretaker would serve as executor and trustee, that her grandson would receive all of her personal property, and that the trust's interest income would be distributed evenly between the caretaker and her one grandson.
At the decedent's death, the granddaughter submitted the first will and the caretaker submitted the second for probate. There was some dispute over whether the caretaker was a care custodian under the CA Probate Code and whether this invalidated the second will and trust. Ultimately, the parties settled all disputes. The second will and trust was invalidated and the caretaker received $757,000.
The estate then deducted, as administration expenses, the funds paid to the caretaker in the settlement. The IRS disallowed the deduction.
The Tax Court cited section 2053 in siding with the IRS. Section 2053 states that a claim against an estate is deductible if it is supported by adequate consideration and not attributable to the testator's intent. The IRS cited several cases where settlement payments to beneficiaries were not deductible. The estate tried to distinguish the cases on the basis that the settlements in those cases were all made to family members, whereas the decedent's caretaker was not a family member. The Tax Court rejected this argument and stated that the reasoning is equally applicable to cases involving nonfamily members. Since he was a beneficiary of the first will and trust, the caretaker's claim represented a beneficiary's claim to a distributive share of the estate, rather than a creditor's claim against the estate. The Tax Court held that the settlement was merely a resolution to the amount a particular beneficiary received.