Discussion Topic: Family Rights and Estate Property
Before her death, Rebecca entered into the following transactions:
- Rebecca borrowed $750,000 from her sister, Mary, so that Rebecca could start a business. The loan was on open account, and no interest or due date was provided for. Under applicable state law, collection on the loan was barred by the statute of limitations before Rebecca died. Because the family thought that Mary should recover her funds, the executor of the estate paid her $750,000.
- Rebecca promised her brother, Michael, a bequest of $400,000 if Michael would move in with her and care for her during an illness (which eventually proved to be terminal). Rebecca never kept her promise; her will was silent on any bequest to Michael. After Rebecca’s death, Michael sued the estate and eventually recovered $500,000 for breach of contract.
Address each of these transactions and discuss the estate and income tax ramifications. Explain your conclusions, and support with references from the text, the partial list of research aids below, and/or other related tax code, regulations, etc. Remember to review at least two of your classmates’ responses and provide your feedback. Please review the Discussion Board Participation grading rubric under Course Resources.
Partial list of research aids:
§ 2053.
Reg. §§ 20.2053–4(d)(4) and (7).
Estate of Allie W. Pittard, 69 T.C. 391 (1977).
Joseph F. Kenefic, 36 TCM 1226, T.C.Memo. 1977–310.
Hibernia Bank v. U.S., 78–2 USTC ¶13,261, 42 AFTR 2d 78–6510, 581 F.2d 741 (CA–9, 19
Do the discussion and response each posted down below.
Posted 1
Hello Professor and classmates,
These scenarios often happen between family members and relative. I am from China and I knew a lot of these story. In China, family members have a lot of these financial obligations and burdens between each other. The first one, Rebecca borrowed the money from her sister which is a loan. Generally, the deceased person’s estate is responsible for paying any unpaid debts. The estate’s finances are handled by the personal representative, executor, or administrator. That person pays any debts from the money in the estate, not from their own money. If the loan passed the time limitation, then the money her sister get from estate will be subject to estate tax. However, the statute of limitation excluded collection on the loan because the interest was not collected and no term for the loan. Mary should receive the money back as a payment of original loan which is not subject to estate tax.
The second case, Rebecca promised her brother Michael to give the $40,000 as bequeath which is not a clear agreement or do not have a signed contract. The money could be considered as a salary or home service care payment from her if her sister performed the service. Otherwise, if the executor paid Michael, the money could consider as gift and subject to gift tax.
References
Court., U. S. T. (n.d.). ESTATE of PITTARD v. COMM: 69 t.c. 391 (1977): Actc3911432. Leagle. https://www.leagle.com/decision/197746069actc3911432.
Legal Information Institute. (n.d.). 26 CFR § 20.2053-4 – deduction for claims against the estate. Legal Information Institute. https://www.law.cornell.edu/cfr/text/26/20.2053-4.
Posted 2
Mary is pretty darn lucky in this situation. For § 2053 deduction purposes, the claims of persons related to the decedent are usually highly suspect, particularly where there is no evidence of a loan. However, the family’s knowledge and corroboration of the loan was a benefit to Mary to recover her money. But even if the loan’s existence is recognized, the fact that a repayment can be avoided by invoking the statute of limitations will preclude its deductibility under § 2053. See Reg. §§ 20.2053–4(d)(4) and (7). Therefore, due to the expiration of the statute of limitations, it cannot be included in the exclusion but is subject to the 40% estate tax.
It is most unfortunate when families have legal issues like this. Nevertheless, I do believe it was necessary for this situation. Michael most likely gave up a job and a home to take care of his ill sister with a promise of a lump sum payment for his sacrifice and special care. I would have done the same thing as Michael. Michael’s recovery of $500,000 should be deductible as a claim against the estate under § 2053(a)(3). Since Michaels’s recovery represents payment for services he rendered to Rebecca, such amount is includible in her gross income under § 61(a)(1).
References
Service, I. R. (2009, October 20). Guidance Under Section 2053 Regarding Post-Death Events. Retrieved from Federal Register : https://www.federalregister.gov/documents/2009/10/…
Posted 3
Hello Everyone,
• In the first scenario, Rebecca borrowed money from her sister during her life however, there were no specifics on the loan such as an interest rate that would cause an accrual of interest over a certain period to be paid back, nor was there a due date on the repayment of the loan. The applicable state law provided that the statute of limitation had passed for the collection of the loan before Rebecca had even died. Since this was not technically a claim against the estate it does not get recognition as a deduction when computing the taxable estate. Therefore, this money that was given to Mary would be included in the taxable estate of Rebecca and taxed at the 40% estate tax rate (Raabe et al., 2022). Also, because it was passed the statute of limitations, § 20.2053-1 further shows that this would not constitute a deduction. This would not be considered income to Mary and taxed as income because it was previously taxed under the estate.
• In the second scenario, Rebecca promised her brother Michael that she would bequeath (or gift him) $400,000 if he would move in with her and take care of her during her illness. This money would have been considered as payment for services rendered. Michael sued the estate and won for breach of contract and was awarded $500,000. Regardless of whether this was awarded due to breach of contract it was money that was owed to Michael for services rendered. Therefore, as in Kenefic v. Commissioner, this is considered taxable income for Michael. However, because it was a claim against the estate, it is deductible from the taxable estate and not included in the calculation of estate taxes due.
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