Iowa Administrative Code › Agency 701 - Revenue Department › Title I - Administration › Chapter 86 - Inheritance Tax › Rule 701-86.6 - The Net Estate

Current through Register Vol. 47, No. 3, July 24, 2024
(1)
Liabilities deductible.
a.
Debts owing by decedent.
A debt, to be allowed as a deduction
				in determining the net estate under Iowa Code section
				45012.,
				must be the liability of the decedent and also be owing and not discharged at
				the time of the decedent's death. The amount allowable as a deduction is the
				principal amount due, plus interest accruing to the day of the decedent's
				death. If the decedent is not the only person liable for the debt, only a
				portion of the debt shall be deducted for inheritance tax purposes. The portion
				deducted is based on the number of solvent obligors. If a joint and several
				debt has more than one obligor and one obligor pays the remaining balance owed
				on the debt, the obligor who pays the remaining debt has a right of
				contribution for payment of the debt against the other solvent obligors. If the
				decedent is the obligor and the estate pays the remaining balance of the debt,
				the estate must list the right of contribution as an asset on the Iowa
				inheritance tax return.
In re Estate of Tollefsrud,
275 N.W.2d
				412 (Iowa 1979);
In re Estate of Thomas,
454 N.W.2d 66 (Iowa
				App. 1990);
Estate of Pauline Bladt,
Department of Revenue and
				Finance, Hearing Office Decision, Docket No. 95-70-1-0174 (December 16, 1996).
				The term "debt owing by the decedent" is not defined in Iowa Code section
				45012..
				However, Iowa Code section
				6333(10).
				defines "debts" as including liabilities of the decedent which survive, whether
				arising in contract, tort, or otherwise.
The term "debt of the decedent" does not include taxes, which
				  are an impost levied by authority of government upon its citizens or subjects
				  for the support of the state.
Eide v. Hottman,
257 Iowa 263,
				  265, 132 N.W.2d 755 (1965). Please note, that this is a nonexclusive example of
				  "debt of the decedent." Promissory notes executed by the decedent without
				  consideration are not debts of the decedent and are not allowable as a
				  deduction in determining the net estate subject to tax.
In re
				  McAllister's Estate,
214 N.W.2d 142 (Iowa 1974). Payments to persons
				  in compromise of their claim to a portion of the estate made by those persons
				  who take from the decedent are not debts nor treated as expenses of
				  settlement.
In re Estate of Bliven,
236 N.W.2d 366, 371 (Iowa
				  1975);
In re Estate of Wells,
142 Iowa 255, 259, 260, 120 N.W.
				  713 (1909).
Iowa Code section 450.12 and Internal Revenue Code Section
				  2053 provide that debts owing by the decedent to be allowable in computing the
				  net estate must be the type of obligation of the decedent for which a claim
				  could be filed and be enforced in the probate proceedings of the
				  estate.
In re Estate of McMahon,
237 Iowa 236, 21 N.W.2d 581
				  (1946);
In re Estate of Laartz,
Cass County District Court,
				  Probate No. 9641 (1973);
In re Estate of Tracy,
Department of
				  Revenue and Finance, Hearing Officer Decision Docket No. 77-167-3-A (1977).
				  Filing a claim in probate proceedings is not a prerequisite for the allowance
				  of the liability as a deduction in computing the net estate. An allowable
				  liability is deductible whether or not the liability is legally enforceable
				  against the decedent's estate. Claims in probate founded on a promise or
				  agreement are deductible only to the extent they were contracted bona fide and
				  for an adequate and full consideration.
In re McAllister's
				  Estate,
214 N.W.2d 142 (Iowa 1974).
The debt must have been paid prior to the filing of the
				  inheritance tax return, or if the debt is not paid at the time the final
				  inheritance tax return is filed (which is frequently the case in installment
				  obligations) the burden is on the taxpayer to establish, if requested by the
				  department, that the debt will be paid at a future date. The validity of a
				  claim in probate based on a liability of the decedent is subject to review by
				  the department.
In re Estate of Stephenson,
234 Iowa 1315,
				  1319, 14 N.W.2d 684 (1944).
If any doubt or ambiguity exists whether an item is
				  deductible or not, it is to be strictly construed against the taxpayer.
				  Therefore, the burden is on the taxpayer to establish that an item is
				  deductible.
In re Estate of Waddington,
201 N.W.2d 77 (Iowa
				  1972).
The department may require the taxpayer to furnish reasonable
				  proof to establish the deductible items such as, but not limited to, canceled
				  checks in payment of an obligation, copies of court orders allowing claims
				  against the estate, attorney and fiduciary fees, allowances for the surviving
				  spouse, and copies of notes and mortgages.
b.
Mortgages
-
decedent's debt. A
mortgage or other
				encumbrance securing a debt of the decedent on Iowa property in which the
				decedent had an interest is allowable as a deduction in determining the net
				estate in the same manner as an unsecured debt of the decedent, even though it
				may be deducted from different shares of the estate than unsecured debts. (See
				Iowa Code section
				633278..)
				However, if the debt of the decedent is secured by property located outside
				Iowa, which is not subject to Iowa inheritance tax, the debt is allowable as a
				deduction in determining the net estate, only in the amount the debt exceeds
				the value of the property securing the debt.
c.
Mortgages
-
not
				decedent's debt.
If the gross estate includes property subject to a
				mortgage or other encumbrance which secures a debt which is not enforceable
				against the decedent, the amount of the debt, including interest accrued to the
				day of death, is deductible, not as a debt of the decedent, but from the fair
				market value of the encumbered property. The deduction is limited to the amount
				the decedent would have had to pay to remove the encumbrance less the value, if
				any, of the decedent's right of recovery against the debtor. See
Home
				Owners Loan Corp. v. Rupe,
225 Iowa 1044, 1047, 283 N.W. 108 (1938),
				for circumstances under which the right of subrogation may exist.
d.
Mortgages
-
nonprobate property. A
debt secured by
				property not subject to the jurisdiction of the probate court, such as, but not
				limited to, jointly owned property and property transferred within three years
				of death is deducted in the same manner as a debt secured by probate property.
				The fact the property is includable in the gross estate is the controlling
				factor in determining the deductibility of the debt (providing the debt is
				otherwise deductible).
e.
Inheritance and accrued taxes.
(1)
				Inheritance tax. The inheritance tax imposed in the decedent's estate is not a
				tax on the decedent's property nor is it a state tax due from the estate. It is
				a succession tax on a person's right to take from the decedent. The tax is the
				obligation of the person who succeeds to property included in the gross
				estate.
Wieting v. Morrow,
151 Iowa 590, 132 N.W. 193
				(1911);
Waterman v. Burbank,
196 Iowa 793, 195 N.W. 191 (1923).
				Therefore, inheritance tax is not a deduction in determining the net estate of
				the decedent in which the tax was imposed. However, if a taxpayer dies owing an
				inheritance tax imposed in another estate, the tax imposed in the prior estate,
				together with penalty and interest owing, if any, is a deduction as a state tax
				due in the deceased taxpayer's estate.
(2) Accrued taxes. In Iowa, property taxes
				accrue on the date that they are levied even though they are not due and
				payable until the following July 1.
In re Estate of Luke,
184
				N.W2d 42 (Iowa 1971);
MervE. Hilpipre Auction Co. v. Solon State
				Board,
343 N.W2d 452 (Iowa 1984).
Death terminates the decedent's taxable year for income tax
				  purposes. Federal regulation Section 1.443 -l(a)(2), 701-paragraph
				  89.4(9)
"b. "
As a result, the Iowa tax on the decedent's
				  income for the taxable year ending with the decedent's death is accrued on date
				  of death.
In addition, any federal income tax for the decedent's final
				  taxable year is owing at death, even though it is not payable until a later
				  date. Therefore, both the decedent's state and federal income taxes, both for
				  prior years and the year of death, are deductible in computing the taxable
				  estate if unpaid at death.
f.
Federal taxes.
Deductible under this category are the federal estate taxes and federal taxes
				owing by the decedent including any penalty and interest accrued to the date of
				death. Prior to 1983, the federal estate tax was prorated based on the portion
				of federal estate tax attributable to Iowa property and that attributable to
				property located outside the state of Iowa. However, currently the
				deductibility of federal estate tax is treated like other liabilities of the
				estate. For estates with property located in Iowa and outside the state of
				Iowa, see the proration computation provided in 86.6(2). The deduction is
				limited to the net federal tax owing after all allowable credits, such as the
				federal credit for state death taxes paid, have been subtracted. Any penalty
				and interest imposed or accruing on federal taxes after the decedent's death is
				not deductible.
g.
Funeral
				expenses.
The deduction is limited to the expense of the decedent's
				funeral, which includes, but is not limited to, flowers, cost of meals, cards
				and postage. Expenses that are not deductible include, but are not limited to,
				family travel expenses. If the decedent at the time of death was liable for the
				funeral expense of another, such expense is categorized as a debt of the
				decedent and is deductible subject to the same conditions as other debts of the
				decedent.
In re Estate of Porter,
212 Iowa 29, 236 N.W. 108
				(1931). A devise in the decedent's will, or a direction in a trust instrument,
				to pay the funeral expense of a beneficiary upon death is an additional
				inheritance in favor of the beneficiary and not a funeral expense deductible in
				the estate of the testator or grantor. Funeral expense is the liability of the
				estate of the person who has died.
In re Estate of Kneebs,
246
				Iowa 1053, 70 N.W.2d 539 (1955).
What constitutes a reasonable expense for the decedent's
				  funeral depends upon the facts and circumstances in each particular estate.
				  Factors to be considered include, but are not limited to: the decedent's
				  station in life and the size of the estate,
Foley v. Brocksmit,
119 Iowa 457, 93 N.W. 344 (1903); and the decedent's known wishes (tomb rather
				  than a grave),
Morrow v. Durant,
140 Iowa 437, 118 N.W. 781
				  (1908). Funeral expense includes the cost of a tombstone or monument.
In
				  re Estate of Harris, Til
Iowa 613, 23 N.W2d 445 (1946). A reasonable
				  fee or honorarium paid to the officiating clergy is a deductible funeral
				  expense.
In re Estate of Kneebs,
246 Iowa 1053, 1058, 70 N.W2d
				  539 (1955). It is not a prerequisite for deductibility that a claim for funeral
				  expenses be filed and allowed in the probate proceedings. It is sufficient that
				  the expense be paid whether or not the claim is legally enforceable against the
				  decedent's estate. The deduction allowable is limited to the net expense of the
				  decedent's funeral, after deducting any expense prepaid by the decedent, burial
				  insurance or death benefit, such as the death benefit allowed by the veterans
				  administration or the social security administration.
h.
Allowance for surviving spouse
				and dependents.
An allowance for the support of the surviving spouse
				and dependents to be deductible in determining the net estate for taxation must
				meet two conditions: First it must be allowed and ordered by the court and
				second it must be paid from the assets of the estate that are subject to the
				jurisdiction of the probate court. The allowance is not an additional exemption
				for the spouse or children. It is part of the costs of administration of the
				decedent's estate. Iowa Code section
				633374.;
In
				re Estate of DeVries,
203 N.W2d 308, 311 (Iowa 1972). Upon request of
				the department, the taxpayer shall submit a copy of the order of the court
				providing for the allowance and copies of canceled checks or other documents
				establishing payment of the allowance.
For the purpose of determining the shares of heirs or
				  beneficiaries for inheritance tax, the allowance is a charge against the corpus
				  of the shares of the estate even though it is paid from the income of the
				  shares. The allowance is included with the other debts and charges for the
				  purpose of abatement of shares to pay the debts and charges of the
				  estate.
i.
Court
				costs.
The deduction under this category is limited to Iowa court
				costs only.
In re Estate of Evans,
246 Iowa 893, 68 N.W2d 289
				(1955). The term "court costs" is not synonymous with "costs of administration"
				as defined in Iowa Code section
				6333(8).
				or "administration expenses" under Section 2053(a) of the Internal Revenue
				Code. See federal regulation Section 20.2053 -3(d). "Court costs" is a narrower
				term. Court costs are part of costs of administration in Iowa and are an
				expense of administration under the Internal Revenue Code, but not all costs or
				expenses of administration are court costs. For example, interest payable on an
				extension of time to pay the federal estate tax is a cost of administration in
				the estate in which the federal estate tax is imposed, but it is not part of
				court costs, and therefore not deductible for inheritance tax purposes.
In general, court costs include only those statutory fees and
				  expenses relating directly to the probate proceeding, carried on the clerk's
				  docket, and paid routinely in the process of closing every estate.
In re
				  Estate of Waddington,
201 N.W2d 77, 79 (Iowa 1972). The term "court
				  costs" since August 15, 1975, also includes the expenses of selling property.
				  See Iowa Code sections 450.12 and 633.3(8) and Internal Revenue Code Section
				  2053 for further details.
j.
Additional liabilities that are
				deductible.
Subject to subrules 86.6(4) and 86.6(5), the only
				liabilities deductible from the gross value of the estate include debts owing
				by the decedent at the time of death, local and state taxes accrued before the
				decedent's death, federal estate tax and federal taxes owing by the decedent, a
				sum for reasonable funeral expenses, the allowance for surviving spouse and
				minor children granted by the probate court or its judge, court costs, and any
				other administration expenses allowable pursuant to Section 2053 of the
				Internal Revenue Code.
(1) Criteria for
				deductible administration expenses under Section 2053 of the Internal Revenue
				Code. Administration expenses must meet certain requirements to be allowable
				deductions under Section 2053 of the Internal Revenue Code. To be allowable
				deductions, expenses must meet the following conditions:
1. The expenses must be payable out of
				property subject to claims;
2. The
				expenses are allowable (not based on the deductible amount) by the law
				governing the administration of the decedent's estate;
3. The expenses are actually and necessarily
				incurred in the administration of the estate. Administration expenses are
				limited to those expenses incurred in the settlement of the estate and the
				transfer of the estate property to beneficiaries and trustees, including an
				executor that is a trustee. Expenses that are not essential to the settlement
				of the estate, but are incurred for the individual benefit of the heirs,
				legatees, or devisees, may not be taken as deductions; and
4. The allowable amount of expenses for
				deduction is limited to the value of property included in the decedent's gross
				estate and subject to claims, plus amounts paid out of the property not subject
				to claims against the decedent's estate, on or before the last day of the ninth
				month after death or within any granted extension(s) of time for filing the
				return. "Property subject to claims" is defined as the property includable in
				the gross estate which bears the burden or would bear the burden under law for
				payment of the deduction in the final adjustment and settlement of the
				decedent's estate, less an initial deduction allowable under Section 2054 of
				the Internal Revenue Code, for any losses for casualty or theft attributable to
				such property and incurred during the settlement of the estate.
(2) Allowable administration
				expenses. Subject to the limitations in paragraph "a" of this subrule,
				allowable administration expenses under Section 2053 of the Internal Revenue
				Code include costs and fees incurred in the collection of assets, payment of
				debts, distribution of property to entitled persons, executor's commission,
				attorney's fees, and miscellaneous administration expenses. Miscellaneous
				administration expenses include costs or fees for surrogates, accountants,
				appraisers, clerk hire, storing or maintaining property of the estate, and
				selling the property of the estate. Expenses for preserving and caring for the
				property do not include expenditures for additions or improvements or expenses
				for a longer period than the executor is reasonably required to retain the
				property. Expenses for selling property of the estate are limited to those for
				sales that are necessary in order to pay the decedent's debts, expenses of
				administration, and taxes, preserve the estate, or effect distribution.
				Expenses for selling the property include brokerage fees or auctioneer fees and
				may include the expenses for a sale of an item in a bona fide sale that is
				below the fair market value of the item. The allowable selling expense for an
				item sold below its fair market value to a dealer in such items is the lesser
				of the amount by which the fair market value of the item on the valuation date
				exceeded the proceeds from the sale or the amount by which the fair market
				value of the item on the date of the sale exceeded the proceeds of the
				sale.