Executrix of Estate Pays Dearly for Her Slopiness
From the estate and trust world comes this post from WS+B partner Hal Terr, who reminds us that estate tax returns are under heavy scrtunity, so record keeping and adequate substantiation of all expenses are a must.
When reading this case you can only imagine the presiding judge listening to the evidence and proclaiming in his best John McEnroe “You cannot be serious!”
The executrix was the mother of the decedent. When the decedent was injured in 1992 his mother took care of him; he lived in her house, she fed and clothed him and paid his bills. She did this, according to the facts of the case, “without expectation of repayment.” The expenses for his care were paid in cash and no records were kept substantiating the amounts paid.
When the son passed away in 2006, as executrix the mother gathered the information and provided it to her attorney for the preparation of the federal estate tax return, but kept no records of the work performed by her or her attorney. As such, there was also no substantiation of the amounts paid for executor’s commissions or attorney fees.
The federal estate tax return contained (or failed to contain) the following items at issue:
- Two life insurance policies, the ownership of which were disputed, were omitted from the return;
- A note owned by the decedent was not included as an asset of the estate;
- Deductions for executor commissions of $87,000 and attorney fees of $94,000 were reflected on the return;
- A deduction was taken for a charitable contribution of $142,000; and
- The estate reflected a debt of $175,000 owed to the mother by the decedent to repay her for the expenses she incurred in his care.
Life Insurance Policies
The executrix claimed that two life insurance policies were actually owned by her and not the decedent. She claimed the record of the insurance companies was a mistake of the agent and produced copies of checks of the payments of premiums by her. However, the executrix could not produce any documents concerning the ownership of the policy or testimony of the agent. The Tax Court found the two life insurance policies were included in the taxable estate as it was more likely she paid the premiums on behalf of her son as she paid other expenses for him while he was alive.
Inclusion of the Note
The executrix argued that the note had no value since a January 2005 brokerage statement did not indicate a value and that the issuer “went broke”. The Tax Court found that although the value of the note was not readily ascertainable, it was unlikely that it was worthless since the company’s stock was valued at $19.05 per share. As such, the note should have been included in the taxable estate for the face value of $10,000.
Estate Deductions
Under IRC Section 2053(a)(2), amounts deductible as administration expenses on the estate tax return are limited to those actually and necessarily incurred. The Tax Court found that because the executrix had not substantiated the claimed deductions and had not maintained required records, the executrix had to prove the statutory notice issued by the IRS was incorrect. The Tax Court was not persuaded that the amounts claimed by the executrix for commissions or attorney’s fees were reasonable or that they had been actually and necessarily incurred.
Charitable Contribution
Under IRC Section 2035, an estate is allowed a charitable contribution for amounts transferred to a qualified charitable organization if made during the decedent’s lifetime or by Will. However, the decedent did not have a Will, and the amounts paid to charity were made after the son’s death. As such, the Tax Court disallowed the charitable deduction.
Note Due to Mother
IRC Section 2053(a)(3) provides that a claim against an estate can be deducted if the claims “when founded on a promise or agreement were contracted bona fide and for an adequate and full consideration in money or money’s worth”.
The mother claimed her son owed her $165,000 plus interest for the care she provided during his lifetime. The mother did not keep records for the amounts she provided on the behalf of her son and in her testimony stated “I’m trying to get it from his estate” which suggested to the Tax Court the debt was not valid and enforceable during the son’s lifetime. The son had adequate investments in his brokerage account which suggested that the debt owed to his mother could have been paid if the son recognized the debt as valid. The Tax Court was not convinced the debt was real and did not allow the deduction.
What can be learned from this case: The executrix was assisted by the attorney who had prepared the estate tax return but was not admitted to practice before the Tax Court. It should go without saying that if one is due before the Tax Court, one should make sure their counsel is actually allowed to help. As Sean Connery says in the movie “Untouchables” you don’t bring a knife to a gunfight.
Given the increases in the federal estate exemption, fewer federal estate tax returns will be filed and those that are actually filed will be scrutinized. As such, executors should make sure they have adequate documentation to support the assets and deductions claimed on the estate tax return in the event of examination.
