CONSIDERATION OF POST-DEATH EVENTS IN REGARD TO ESTATE TAX DEDUCTIONS

In computing federal estate tax, both assets and liabilities of the decedent's estate are valued as of the date of death (subject to alternate value of assets at the 6 month anniversary). If an estate has a liability to a third party as of the date of death, which liability eventually disappears because the creditor does not timely assert its rights, is there a deduction allowed for the liability? Applying the date of death rule, it would appear that a deduction should be allowed since as of the date of death the liability existed.

Nonetheless, courts are understandingly hesitant to allow a deduction for an item that will never be paid. As such, they have developed an exception to the general rule and will look to post-death events to examine the viability of claims against the estate.

In Estate of Heister, 99 AFTR 2nd 2007-1288 (DC VA 2007), a decedent misappropriated funds while acting as a trustee, in breach of his fiduciary duties. His estate asserted that it should be able to deduct, for federal estate tax purposes, the estate's theoretical liability to the beneficiaries. At the time of death, the statute of limitations for a claim against the decedent had not expired, but they did expire shortly thereafter, so the theoretical liability would never be paid. The District Court determined that such post-death expiration of the statute of limitation should be considered in valuing the deduction for the claim, and disallowed the deduction. The Court noted a similar Florida case where a potential estate claimant failed to timely file a claim in a Florida probate proceeding, and thus had its claim barred. In that case, (Estate of Hagmann v. Commissioner, 60 T.C. 465 (1975), aff'd per curium, 492 F.2d 796 (5th Cir. 1974), the Tax Court likewise barred a deduction for such an expired claim.

The Court in Heister also noted that a "theoretical liability" is not the same as a deductible claim for estate tax purposes. Where a creditor in fact does not assert a claim against the estate, this is a "theoretical liability" only and is not deductible.