[Federal Register Volume 64, Number 232 (Friday, December 3, 1999)]
[Rules and Regulations]
[Pages 67763-67767]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-31094]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 20
[TD 8846]
RIN 1545-AV45
Deductions for Transfers for Public, Charitable, and Religious
Uses; In General Marital Deduction; Valuation of Interest Passing to
Surviving Spouse
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations relating to the
effect of certain administration expenses on the valuation of property
that qualifies for either the estate tax marital deduction under
section 2056 of the Internal Revenue Code or the estate tax charitable
deduction under section 2055. The regulations distinguish between
estate transmission expenses, which reduce the value of property for
marital and charitable deduction purposes, and estate management
expenses, which generally do not reduce the value of property for these
purposes.
EFFECTIVE DATES: These regulations are effective on December 3, 1999.
FOR FURTHER INFORMATION CONTACT: Deborah Ryan, (202) 622-3090 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On December 16, 1998, the Treasury Department and the IRS published
in the Federal Register (63 FR 69248) a notice of proposed rulemaking
(REG-114663-97) relating to the effect of certain administration
expenses on the valuation of property which qualifies for the estate
tax marital or charitable deduction. The proposed regulations were
issued in response to the decision of the Supreme Court of the United
States in Commissioner v. Estate of Hubert, 520 U.S. 93 (1997) (1997-2
C.B. 231). Written comments responding to the notice of proposed
rulemaking were received, and a public hearing was held on April 21,
1999, at which time oral testimony was presented. This Treasury
decision adopts final regulations with respect to the notice of
proposed rulemaking. A summary of the principal comments received and
revisions made in response to those comments is provided below.
The proposed regulations set forth the substantive provisions as
applied to the estate tax marital deduction in Sec. 20.2056(b)-4(a).
For the estate tax charitable deduction, the proposed regulations
(under Sec. 20.2055-1(d)(6)) merely cross-reference the rules for the
marital deduction.
Several commentators suggested that the regulations under section
2055 should contain specific rules relating to the charitable
deduction, rather than just a cross-reference. The Treasury and the IRS
agree with this suggestion. The final regulations contain rules under
Sec. 20.2055-3 specifically addressing the effect of administration
expenses on the valuation of property when all or a portion of the
interests in property qualify for the estate tax charitable deduction.
Several commentators stated that the distinction between estate
transmission expenses and estate management expenses was not clearly
made in the proposed regulations and requested more concrete
definitions of each type of expense. In response to these comments, the
final regulations characterize estate transmission expenses as those
expenses that would not have been incurred except for the decedent's
death. Although the amount of these expenses cannot be calculated with
any degree of certainty on the date of the decedent's death, they are
expenses that are incurred because of the decedent's death. Estate
management expenses, on the other hand, are characterized in the final
regulations as expenses that would be incurred with respect to the
property even if the decedent had not died; that is, expenses incurred
in investing, maintaining, and preserving the property. These are
expenses that typically would have been incurred with respect to the
property by the decedent before death or by the beneficiaries had they
received the property on the date of death without any intervening
period of administration. In order to be certain that all expenses are
classified as either transmission expenses or management expenses,
transmission expenses are defined to include all expenses that are not
management expenses.
Three commentators stated that the different treatment accorded to
estate transmission expenses and estate management expenses under the
proposed regulations creates a new federal standard for allocating
expenses that may be contrary to the manner in which the expenses must
be charged under state law. However, the Treasury and the IRS believe
that the allocation of administration expenses based on the distinction
between transmission and management expenses provides the most accurate
measure of the value of the property which passes to the surviving
spouse or to the charity at the moment of the decedent's death for
federal estate tax marital and charitable deduction purposes.
Transmission expenses that are charged to the property passing to the
surviving spouse or to the charity reduce the amount of that property
as of the date of the decedent's death because the expenses, as well as
the transfer to the surviving spouse or to charity, are a consequence
of, and arise as a result of, the decedent's death. In contrast,
management expenses do not generally
[[Page 67764]]
reduce the amount of the property passing from the decedent as of the
date of the decedent's death because these expenses are incurred in
producing income and preserving and maintaining the property between
the date of the decedent's death and the date of distribution. These
expenses are the ongoing, year-to-year expenses incurred in the
investment, preservation, and maintenance of property by property
owners.
In response to other comments, the final regulations illustrate the
application of these rules to pecuniary bequests to the surviving
spouse. If, under the terms of the governing instrument or applicable
local law, the recipient of a pecuniary bequest is not entitled to
income earned until distribution, the income is not included in the
definition of the marital or charitable share. Thus, the amount of the
property passing to the surviving spouse or charity for which a marital
or charitable deduction is allowable will not be reduced even if estate
transmission or estate management expenses are paid out of the income
earned by assets that will be used to satisfy the pecuniary bequest.
Two commentators requested guidance in applying the regulations to
estates that are intended to be nontaxable. Accordingly, the final
regulations add two examples, one involving a formula designed to
produce zero estate taxes and the other involving a pecuniary bequest
designed to utilize the applicable exclusion amount under section 2010.
Many of the comments concerned the special rule of Sec. 20.2056(b)-
4(e)(2)(ii) of the proposed regulations. Under the special rule, the
value of the deductible property interest is not increased as a result
of the decrease in the federal estate tax liability that is
attributable to the deduction of estate management expenses as expenses
of administration under section 2053 on the federal estate tax return.
A similar rule would have applied for purposes of the estate tax
charitable deduction.
Several of these commentators argued that the special rule is
inconsistent with sections 2056(a) and 2055(c), because the value of
the property passing to the surviving spouse or charity should be
reduced only by the estate taxes actually paid. Thus, an estate should
be permitted the full benefit of deducting management expenses on the
federal estate tax return, including an increase to the marital or
charitable deduction based on the resultant decrease in tax payable
from the marital or charitable share.
Conversely, other commentators asserted that the special rule does
not conform with section 2056(b)(9). Section 2056(b)(9) provides that
nothing in section 2056 or any other estate tax provision shall allow
the value of any interest in property to be deducted for federal estate
tax purposes more than once with respect to the same decedent. These
commentators pointed out that if estate management expenses paid from
the marital or charitable share are deducted on the federal estate tax
return, and no reduction is made to the allowable amount of the marital
or charitable deduction, then the same property interest is deducted
twice in violation of section 2056(b)(9).
After considering these comments, the Treasury and the IRS have
eliminated the special rule of the proposed regulations. The final
regulations provide that estate management expenses attributable to,
and payable from, the property interest passing to the surviving spouse
or charity do not reduce the value of the property interest. However,
pursuant to section 2056(b)(9), the allowable amount of the marital or
charitable deduction is reduced by the amount of these management
expenses if they are deducted on the Federal estate tax return.
The Treasury and the IRS believe that the principles which apply
for determining the value of the marital and charitable deductions
should also apply for determining the value of property that passes
from one decedent to another when calculating the amount of the credit
for tax on prior transfers under section 2013. Therefore, the final
regulations amend Sec. 20.2013-4(b) by adding a cross reference to
Sec. 20.2056(b)-4(d).
Effective Dates
The regulations under sections 2055 and 2056 are applicable to
estates of decedents dying on or after December 3, 1999. The
regulations under section 2013 are applicable to transfers from estates
of decedents dying on or after December 3, 1999.
Effect on Other Documents
The following publications are obsolete as of December 3, 1999.
Rev. Rul. 66-233 (1996-2 C.B. 428)
Rev. Rul. 73-98 (1973-1 C.B. 407)
Rev. Rul. 80-159 (1980-1 C.B. 206)
Rev. Rul. 93-48 (1993-2 C.B. 270)
Special Analyses
This rule is not a significant regulatory action as defined in
Executive Order 12866. Therefore, a regulatory assessment is not
required. It also has been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to
these regulations, and, because the regulations do not impose a
collection of information on small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of
the Internal Revenue Code, these regulations were submitted to the
Chief Counsel for Advocacy of the Small Business Administration for
comment on their impact on small business.
Drafting information. The principal author of these regulations is
Deborah Ryan, Office of the Assistant Chief Counsel (Passthroughs and
Special Industries). However, other personnel from the IRS and Treasury
Department participated in their development.
List of Subjects in 26 CFR Part 20
Estate taxes, Reporting and recordkeeping requirements.
Amendments to the Regulations
Accordingly, 26 CFR part 20 is amended as follows:
PART 20--ESTATE TAX; ESTATES OF DECEDENTS DYING AFTER AUGUST 16,
1954
Paragraph 1. The authority citation for part 20 continues to read
in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 20.2013-4 is amended by:
1. Removing ``and'' at the end of paragraph (b)(2).
2. Redesignating paragraph (b)(3) as paragraph (b)(4).
3. Adding a new paragraph (b)(3).
The addition reads as follows:
Sec. 20.2013-4 Valuation of property transferred.
* * * * *
(b) * * *
(3)(i) By the amount of administration expenses in accordance with
the principles of Sec. 20.2056(b)-4(d).
(ii) This paragraph (b)(3) applies to transfers from estates of
decedents dying on or after December 3, 1999; and
* * * * *
Par. 3. Section 20.2055-3 is amended by:
1. Revising the section heading.
2. Adding a paragraph heading for paragraph (a).
3. Redesignating the text of paragraph (a) following the heading
and paragraphs (b) and (c) as paragraph (a)(1) and paragraphs (a)(2)
and (a)(3), respectively.
4. Adding a new paragraph (b).
[[Page 67765]]
The revision and additions read as follows:
Sec. 20.2055-3 Effect of death taxes and administration expenses.
(a) Death taxes. * * *
(b) Administration expenses--(1) Definitions--(i) Management
expenses. Estate management expenses are expenses that are incurred in
connection with the investment of estate assets or with their
preservation or maintenance during a reasonable period of
administration. Examples of these expenses could include investment
advisory fees, stock brokerage commissions, custodial fees, and
interest.
(ii) Transmission expenses. Estate transmission expenses are
expenses that would not have been incurred but for the decedent's death
and the consequent necessity of collecting the decedent's assets,
paying the decedent's debts and death taxes, and distributing the
decedent's property to those who are entitled to receive it. Estate
transmission expenses include any administration expense that is not a
management expense. Examples of these expenses could include executor
commissions and attorney fees (except to the extent of commissions or
fees specifically related to investment, preservation, and maintenance
of the assets), probate fees, expenses incurred in construction
proceedings and defending against will contests, and appraisal fees.
(iii) Charitable share. The charitable share is the property or
interest in property that passed from the decedent for which a
deduction is allowable under section 2055(a) with respect to all or
part of the property interest. The charitable share includes, for
example, bequests to charitable organizations and bequests to a
charitable lead unitrust or annuity trust, a charitable remainder
unitrust or annuity trust, and a pooled income fund, described in
section 2055(e)(2). The charitable share also includes the income
produced by the property or interest in property during the period of
administration if the income, under the terms of the governing
instrument or applicable local law, is payable to the charitable
organization or is to be added to the principal of the property
interest passing in whole or in part to the charitable organization.
(2) Effect of transmission expenses. For purposes of determining
the charitable deduction, the value of the charitable share shall be
reduced by the amount of the estate transmission expenses paid from the
charitable share.
(3) Effect of management expenses attributable to the charitable
share. For purposes of determining the charitable deduction, the value
of the charitable share shall not be reduced by the amount of the
estate management expenses attributable to and paid from the charitable
share. Pursuant to section 2056(b)(9), however, the amount of the
allowable charitable deduction shall be reduced by the amount of any
such management expenses that are deducted under section 2053 on the
decedent's federal estate tax return.
(4) Effect of management expenses not attributable to the
charitable share. For purposes of determining the charitable deduction,
the value of the charitable share shall be reduced by the amount of the
estate management expenses paid from the charitable share but
attributable to a property interest not included in the charitable
share.
(5) Example. The following example illustrates the application of
this paragraph (b):
Example. The decedent, who dies in 2000, leaves his residuary
estate, after the payment of debts, expenses, and estate taxes, to a
charitable remainder unitrust that satisfies the requirements of
section 664(d). During the period of administration, the estate
incurs estate transmission expenses of $400,000. The residue of the
estate (the charitable share) must be reduced by the $400,000 of
transmission expenses and by the Federal and State estate taxes
before the present value of the remainder interest passing to
charity can be determined in accordance with the provisions of
Sec. 1.664-4 of this chapter. Because the estate taxes are payable
out of the residue, the computation of the estate taxes and the
allowable charitable deduction are interrelated. See paragraph
(a)(2) of this section.
(6) Cross reference. See Sec. 20.2056(b)-4(d) for additional
examples applicable to the treatment of administration expenses under
this paragraph (b).
(7) Effective date. The provisions of this paragraph (b) apply to
estates of decedents dying on or after December 3, 1999.
Par. 4. Section 20.2056(b)-4 is amended by:
1. Removing the last two sentences of paragraph (a).
2. Redesignating paragraph (d) as paragraph (e).
3. Adding a new paragraph (d).
The addition reads as follows:
Sec. 20.2056(b)-4 Marital deduction; valuation of interest passing to
surviving spouse.
* * * * *
(d) Effect of administration expenses--(1) Definitions--(i)
Management expenses. Estate management expenses are expenses that are
incurred in connection with the investment of estate assets or with
their preservation or maintenance during a reasonable period of
administration. Examples of these expenses could include investment
advisory fees, stock brokerage commissions, custodial fees, and
interest.
(ii) Transmission expenses. Estate transmission expenses are
expenses that would not have been incurred but for the decedent's death
and the consequent necessity of collecting the decedent's assets,
paying the decedent's debts and death taxes, and distributing the
decedent's property to those who are entitled to receive it. Estate
transmission expenses include any administration expense that is not a
management expense. Examples of these expenses could include executor
commissions and attorney fees (except to the extent of commissions or
fees specifically related to investment, preservation, and maintenance
of the assets), probate fees, expenses incurred in construction
proceedings and defending against will contests, and appraisal fees.
(iii) Marital share. The marital share is the property or interest
in property that passed from the decedent for which a deduction is
allowable under section 2056(a). The marital share includes the income
produced by the property or interest in property during the period of
administration if the income, under the terms of the governing
instrument or applicable local law, is payable to the surviving spouse
or is to be added to the principal of the property interest passing to,
or for the benefit of, the surviving spouse.
(2) Effect of transmission expenses. For purposes of determining
the marital deduction, the value of the marital share shall be reduced
by the amount of the estate transmission expenses paid from the marital
share.
(3) Effect of management expenses attributable to the marital
share. For purposes of determining the marital deduction, the value of
the marital share shall not be reduced by the amount of the estate
management expenses attributable to and paid from the marital share.
Pursuant to section 2056(b)(9), however, the amount of the allowable
marital deduction shall be reduced by the amount of any such management
expenses that are deducted under section 2053 on the decedent's Federal
estate tax return.
(4) Effect of management expenses not attributable to the marital
share. For purposes of determining the marital deduction, the value of
the marital share shall be reduced by the amount of the estate
management expenses paid from the marital share but attributable to a
property interest not included in the marital share.
[[Page 67766]]
(5) Examples. The following examples illustrate the application of
this paragraph (d):
Example 1. The decedent dies after 2006 having made no lifetime
gifts. The decedent makes a bequest of shares of ABC Corporation
stock to the decedent's child. The bequest provides that the child
is to receive the income from the shares from the date of the
decedent's death. The value of the bequeathed shares on the
decedent's date of death is $3,000,000. The residue of the estate is
bequeathed to a trust for which the executor properly makes an
election under section 2056(b)(7) to treat as qualified terminable
interest property. The value of the residue on the decedent's date
of death, before the payment of administration expenses and Federal
and State estate taxes, is $6,000,000. Under applicable local law,
the executor has the discretion to pay administration expenses from
the income or principal of the residuary estate. All estate taxes
are to be paid from the residue. The State estate tax equals the
State death tax credit available under section 2011.
During the period of administration, the estate incurs estate
transmission expenses of $400,000, which the executor charges to the
residue. For purposes of determining the marital deduction, the
value of the residue is reduced by the Federal and State estate
taxes and by the estate transmission expenses. If the transmission
expenses are deducted on the Federal estate tax return, the marital
deduction is $3,500,000 ($6,000,000 minus $400,000 transmission
expenses and minus $2,100,000 Federal and State estate taxes). If
the transmission expenses are deducted on the estate's Federal
income tax return rather than on the estate tax return, the marital
deduction is $3,011,111 ($6,000,000 minus $400,000 transmission
expenses and minus $2,588,889 Federal and State estate taxes).
Example 2. The facts are the same as in Example 1, except that,
instead of incurring estate transmission expenses, the estate incurs
estate management expenses of $400,000 in connection with the
residue property passing for the benefit of the spouse. The executor
charges these management expenses to the residue. In determining the
value of the residue passing to the spouse for marital deduction
purposes, a reduction is made for Federal and State estate taxes
payable from the residue but no reduction is made for the estate
management expenses. If the management expenses are deducted on the
estate's income tax return, the net value of the property passing to
the spouse is $3,900,000 ($6,000,000 minus $2,100,000 Federal and
State estate taxes). A marital deduction is claimed for that amount,
and the taxable estate is $5,100,000.
Example 3. The facts are the same as in Example 1, except that
the estate management expenses of $400,000 are incurred in
connection with the bequest of ABC Corporation stock to the
decedent's child. The executor charges these management expenses to
the residue. For purposes of determining the marital deduction, the
value of the residue is reduced by the Federal and State estate
taxes and by the management expenses. The management expenses reduce
the value of the residue because they are charged to the property
passing to the spouse even though they were incurred with respect to
stock passing to the child. If the management expenses are deducted
on the estate's Federal income tax return, the marital deduction is
$3,011,111 ($6,000,000 minus $400,000 management expenses and minus
$2,588,889 Federal and State estate taxes). If the management
expenses are deducted on the estate's Federal estate tax return,
rather than on the estate's Federal income tax return, the marital
deduction is $3,500,000 ($6,000,000 minus $400,000 management
expenses and minus $2,100,000 in Federal and State estate taxes).
Example 4. The decedent, who dies in 2000, has a gross estate of
$3,000,000. Included in the gross estate are proceeds of $150,000
from a policy insuring the decedent's life and payable to the
decedent's child as beneficiary. The applicable credit amount
against the tax was fully consumed by the decedent's lifetime gifts.
Applicable State law requires the child to pay any estate taxes
attributable to the life insurance policy. Pursuant to the
decedent's will, the rest of the decedent's estate passes outright
to the surviving spouse. During the period of administration, the
estate incurs estate management expenses of $150,000 in connection
with the property passing to the spouse. The value of the property
passing to the spouse is $2,850,000 ($3,000,000 less the insurance
proceeds of $150,000 passing to the child). For purposes of
determining the marital deduction, if the management expenses are
deducted on the estate's income tax return, the marital deduction is
$2,850,000 ($3,000,000 less $150,000) and there is a resulting
taxable estate of $150,000 ($3,000,000 less a marital deduction of
$2,850,000). Suppose, instead, the management expenses of $150,000
are deducted on the estate's estate tax return under section 2053 as
expenses of administration. In such a situation, claiming a marital
deduction of $2,850,000 would be taking a deduction for the same
$150,000 in property under both sections 2053 and 2056 and would
shield from estate taxes the $150,000 in insurance proceeds passing
to the decedent's child. Therefore, in accordance with section
2056(b)(9), the marital deduction is limited to $2,700,000, and the
resulting taxable estate is $150,000.
Example 5. The decedent dies after 2006 having made no lifetime
gifts. The value of the decedent's residuary estate on the
decedent's date of death is $3,000,000, before the payment of
administration expenses and Federal and State estate taxes. The
decedent's will provides a formula for dividing the decedent's
residuary estate between two trusts to reduce the estate's Federal
estate taxes to zero. Under the formula, one trust, for the benefit
of the decedent's child, is to be funded with that amount of
property equal in value to so much of the applicable exclusion
amount under section 2010 that would reduce the estate's Federal
estate tax to zero. The other trust, for the benefit of the
surviving spouse, satisfies the requirements of section 2056(b)(7)
and is to be funded with the remaining property in the estate. The
State estate tax equals the State death tax credit available under
section 2011. During the period of administration, the estate incurs
transmission expenses of $200,000. The transmission expenses of
$200,000 reduce the value of the residue to $2,800,000. If the
transmission expenses are deducted on the Federal estate tax return,
then the formula divides the residue so that the value of the
property passing to the child's trust is $1,000,000 and the value of
the property passing to the marital trust is $1,800,000. The
allowable marital deduction is $1,800,000. The applicable exclusion
amount shields from Federal estate tax the entire $1,000,000 passing
to the child's trust so that the amount of Federal and State estate
taxes is zero. Alternatively, if the transmission expenses are
deducted on the estate's Federal income tax return, the formula
divides the residue so that the value of the property passing to the
child's trust is $800,000 and the value of the property passing to
the marital trust is $2,000,000. The allowable marital deduction
remains $1,800,000. The applicable exclusion amount shields from
Federal estate tax the entire $800,000 passing to the child's trust
and $200,000 of the $2,000,000 passing to the marital trust so that
the amount of Federal and State estate taxes remains zero.
Example 6. The facts are the same as in Example 5, except that
the decedent's will provides that the child's trust is to be funded
with that amount of property equal in value to the applicable
exclusion amount under section 2010 allowable to the decedent's
estate. The residue of the estate, after the payment of any debts,
expenses, and Federal and State estate taxes, is to pass to the
marital trust. The applicable exclusion amount in this case is
$1,000,000, so the value of the property passing to the child's
trust is $1,000,000. After deducting the $200,000 of transmission
expenses, the residue of the estate is $1,800,000 less any estate
taxes. If the transmission expenses are deducted on the Federal
estate tax return, the allowable marital deduction is $1,800,000,
the taxable estate is zero, and the Federal and State estate taxes
are zero. Alternatively, if the transmission expenses are deducted
on the estate's Federal income tax return, the net value of the
property passing to the spouse is $1,657,874 ($1,800,000 minus
$142,106 estate taxes). A marital deduction is claimed for that
amount, the taxable estate is $1,342,106, and the Federal and State
estate taxes total $142,106.
Example 7. The decedent, who dies in 2000, makes an outright
pecuniary bequest of $3,000,000 to the decedent's surviving spouse,
and the residue of the estate, after the payment of all debts,
expenses, and Federal and State estate taxes, passes to the
decedent's child. Under the terms of the applicable local law, a
beneficiary of a pecuniary bequest is not entitled to any income on
the bequest. During the period of administration, the estate pays
estate transmission expenses from the income
[[Page 67767]]
earned by the property that will be distributed to the surviving
spouse in satisfaction of the pecuniary bequest. The income earned
on this property is not part of the marital share. Therefore, the
allowable marital deduction is $3,000,000, unreduced by the amount
of the estate transmission expenses.
(6) Effective date. The provisions of this paragraph (d) apply to
estates of decedents dying on or after December 3, 1999.
* * * * *
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
Approved: November 22, 1999.
Jonathan Talisman,
Acting Assistant Secretary of the Treasury.
[FR Doc. 99-31094 Filed 12-2-99; 8:45 am]
BILLING CODE 4830-01-U
