1977, May, Pg. 796. Estate and Trust Forum.

6 Colo.Law. 796

Colorado Lawyer

1977.

1977, May, Pg. 796.

Estate and Trust Forum

796Vol. 6, No. 5, Pg. 796Estate and Trust ForumNew Federal Estate Tax Orphans Deduction

Prior to the Tax Reform Act of 1976, the only transfers eligible for a deduction for purposes of the federal estate tax were transfers to charities and surviving spouses. With regard to the estates of decedents dying after December 31, 1976, new section 2057 of the Internal Revenue Code(fn1) provides that certain transfers to orphaned, minor (under age 21) children of the decedent, whether natural or legally adopted, are also deductible from the decedent's gross estate, subject to a limitation in amount based upon the children's ages at the time of the decedent's death.

The reason given by the House Ways and Means Committee for the creation of this new deduction was that a decedent has a generally accepted responsibility to support his minor children that should be encouraged by the federal estate tax law.(fn2)

Limitations

Apparently, Congress was satisfied that minor children would be cared for by a surviving spouse, to whom transfers are encouraged by the marital deduction, even though there is no assurance a surviving spouse will be a parent or guardian of the decedent's children. Consequently, the new deduction is designed to encourage transfers to minor children only when there is no surviving parent of the children and no surviving spouse of the decedent. The marital deduction and the orphans deduction are designed to be mutually exclusive.

In addition to limiting the circumstances in which the new orphans deduction will be available, Congress also placed a maximum on the amount which may be deducted. Apparently on the theory that a decedent has a greater remaining responsibility to support younger children than their older siblings, the maximum deduction for qualifying transfers to each orphaned child is computed by multiplying the excess of 21 over the child's age in years by $5,000. For example, the maximum deduction for qualifying transfers to an orphaned child who is 14 at the decedent's death is $35,000 (21 - 14 = 7 x $5,000). If a decedent was survived by three orphaned children, ages 8, 5 and 3, the maximum deduction would be $235,000 ((21 - 8 = 13 x $5,000) + (21 - 5 = 16 x $5,000) + (21 - 3 = 18 x $5,000)). A qualifying transfer to a child whose twenty-first birthday is the day after the decedent's death would still be entitled to a $5,000 deduction. Absent a medical miracle, the maximum deduction for qualifying transfers to any one orphaned child is $105,000 (21 - 0 = 21 x $5,000), which would occur when the surviving child had not reached his first birthday at the time of the decedent's death.

As cleverly pointed out by Mr. Brauchli in the January 1977 issue of The Colorado Lawyer,(fn3) the new orphans deduction probably will come into play only in very rare cases. The number of orphaned minors is undoubtedly small. The...