Probate & Trust Newsletter: April 2005 - Philadelphia Bar Association

Tax Update, continued
The estate requested a
ruling that the interest attributable
to the loan obtained from the bank
is deductible as an administration
expense under Code Sec. 2053(a)(2),
which provides that the value of
the taxable estate is determined
by deducting from the value of
the gross estate such amounts
for administration expenses as
are allowable by the laws of the
jurisdiction under which the estate
is being administered. Under Reg.
§20.2053-3(a), amounts deductible
from a decedentʼs gross estate
as “administration expenses” are
limited to such expenses as are
actually and necessarily incurred in
the administration of the decedentʼs
estate; that is, in the collection
of assets, payment of debts, and
distribution of property to the
persons entitled to it.
Observing that the estate
and revocable trust (including the
QTIP share) are the co-borrowers
for the full amount of the loan from
the bank and that the estate will
seek contribution from the QTIP
trust for its portion of the deferred
estate taxes as directed in the trust
instrument and required by law, the
Service concluded that the interest
attributable to the loan obtained
from the bank to pay the estateʼs
federal and state estate tax liability
is deductible as an administration
expense under Code Sec. 2053(a)(2),
if it is determined that the loan was
necessary for the administration
of the estate. The ruling expressed
no opinion on whether or to what
extent the loan was necessary for the
administration of the estate.
Right Of Recovery Against QTIP
Property
In PLR 200452010, decedentʼs
husband created a revocable
trust providing that upon his death, a
portion of the trust assets were to be
distributed to a marital trust for the
decedentʼs benefit. Upon decedentʼs
death, the trustee was directed to
divide the balance of the trust estate
into equal shares for the husbandʼs
then living children from a prior
marriage. Following husbandʼs death,
a state court approved the division of
the marital trust in accordance with the
provisions of Code Sec. 2652(a)(3)
and as a result, the marital trust was
divided into two separate QTIP trusts,
one GST-Exempt and one GST Non-
Exempt. Husbandʼs estate made an
election under Code Sec. 2056(b)(7)
with respect to the property held as
part of the QTIP Trusts.
Decedentʼs Will contained
a broad tax clause directing that all
estate, inheritance, succession, death
or similar taxes (except generationskipping
transfer taxes) assessed with
respect to all property or interests in
property included in her estate for
such tax purposes be paid out of her
residuary estate and were not to be
charged to or against any recipient
or beneficiary. The trustee of the
QTIP Trusts stated his intention not
to reimburse the estate for the estate
taxes attributable to the inclusion of
the QTIP Trusts in decedentʼs gross
estate, claiming that under decedentʼs
Will, she waived the estateʼs right of
recovery under Code Sec. 2207A.
The Service ruled that
decedentʼs Will did not waive the
estateʼs right of recovery under Code
Sec. 2207A, and therfore, once the
federal estate tax on decedentʼs estate
has been paid, decedentʼs estate
would be entitled to recover from the
trustee of the QTIP Trusts the amount
of federal estate tax (including
penalties and interest) attributable
to the QTIP Trusts. Decedentʼs will
did not contain any specific language
indicating an intent to waive the
estateʼs right of recovery under Code
Sec. 2207A(a)(1) and therefore the
Service concluded that the broad
tax clause in decedentʼs Will did
not constitute a waiver by decedent
of her estateʼs right to recover
the amount of federal estate taxes
attributable to the QTIP Trusts.
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Probate and Trust Law Section Newsletter No. 111 22