Iowa Administrative Code › Agency 701 - Revenue Department › Title X - Inheritance Tax › Chapter 900 - Inheritance Tax › Rule 701-900.6 - 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
				450.12, 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
				450.12. However, Iowa Code
				section 633.3(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
				633.278.) 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.W.2d 42 (Iowa 1971);
Merv E. Hilpipre Auction Co. v. Solon State
				Board,
343 N.W.2d 452 (Iowa 1984).
Death terminates the decedent's taxable year for income tax
				  purposes. Federal regulation Section
				  1.443 -1(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 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,
237 Iowa 613, 23 N.W.2d 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.W.2d 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
				633.374;
In re Estate of DeVries,
203 N.W.2d 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.W.2d 289
				(1955). The term "court costs" is not synonymous with "costs of administration"
				as defined in Iowa Code section
				633.3(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.W.2d 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.