What part of the estate should pay the estate expenses? A post-Hubert analysis.
Florida Bar Journal › Vol. 72 Nbr. 2, February 1998
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What part of the estate should pay the estate expenses? A post-Hubert analysis.
Estate planners have long faced the question of whether to pay estate expenses and state taxes out of the marital deduction part of the estate, the unified credit shelter part, or perhaps out of some other part such as a charitable deduction gift. The Supreme Court's March 18, 1997, plurality decision in Commissioner v. Estate of Hubert, 117 S. Ct. 1124 (1997), approves another alternative--charging expenses to estate income. To the extent this estate income is otherwise payable to a spouse or charity, the "Hubert technique" can result in more favorable tax effects than pre-Hubert techniques, and hence can offer planning opportunities.
Mr. Hubert's estate was valued at about $30 million. The estate was split about 50-50 between the surviving spouse and charities, thereby qualifying for both a marital deduction(1) and a charitable deduction.(2) Estate expenses were $2 million. The Supreme Court made no finding as to the amount of estate income.(3) The executor was authorized to pay estate expenses out of either the corpus or income of the marital and charitable gifts, and he in fact charged $500,000 to corpus and $1.5 million to income. The marital and charitable deductions were reduced in amount dollar-for-dollar by the $500,000 of expenses charged to corpus. All parties and all nine Justices agreed this was the law.(4) No reductions were made to the marital or charitable deductions for the $1.5 million charged to estate income, which became the issue in the case. The IRS took the position that marital and charitable deductions must be reduced dollar-for-dollar by any estate expenses charged to income otherwise payable to the spouse or charity. The Tax Court and Supreme Court disagreed with the IRS and approved the taxpayer's technique. The case holds that estate expenses charged to estate income will not reduce the size of a marital (or charitable) deduction even though that income...See the full content of this document
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