(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
700.4(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 900.6(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 900.6(4) and 900.6(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.
(2)
Prorated liabilities.
a. The
amount of the liability that is deductible depends upon the situs of the
property in the gross estate.
If part of the property included in the gross estate has a
situs in a jurisdiction other than Iowa, only a pro rata amount of the
liabilities specified in Iowa Code section
450.12, with the exception of
liabilities secured by a lien on property, is deductible in computing the net
estate for Iowa inheritance tax purposes. The amount deductible is computed by
multiplying the total amount of the unsecured liabilities by a fraction of
which the Iowa situs property in the gross estate is the numerator and the
total gross estate is the denominator. For the purpose of apportionment of the
liabilities, the term "gross estate" means the gross estate for federal estate
tax purposes. Provided, if the federal gross estate formula produces a grossly
distorted result then, subject to the approval of the department, an alternate
apportionment formula may be used either by the department or the taxpayer
which fairly represents the particular facts of the estate.
Liabilities secured by a lien on property are allocated to
the state of situs. If the secured liability exceeds the value of the security,
any excess is prorated in the same manner as an unsecured
liability.
b.
Liabilities that must be prorated. If the gross estate
includes property with a situs outside Iowa, the liabilities that must be
prorated are:
(1) court costs, both foreign
and domestic;
(2) unsecured debts of
the decedent regardless of where the debt was contracted;
(3) federal and state income tax, including
the tax on the decedent's final return, federal estate, gift and excise tax,
and state and local sales, use and excise tax;
(4) expenses of the decedent's funeral and
burial, regardless of the place of interment;
(5) allowances for the surviving spouse and
children allowed by the probate court in Iowa or another jurisdiction;
(6) the expense of the appraisal of
property for the purpose of assessing a state death or succession tax;
(7) the fees and necessary expenses
of the personal representative and the personal representative's attorney
allowed by order of court, both foreign and domestic;
(8) the costs of the sale of real and
personal property, both foreign and domestic, if not otherwise included in
court costs; and
(9) the amount paid
by the personal representative for a bond, both foreign and
domestic.
c.
Liabilities that are not prorated. Liabilities secured by a
lien on property included in the gross estate are to be allocated in full to
the state of situs. These are liabilities secured by:
(1) mortgages, mechanic's liens and
judgments;
(2) real estate taxes and
special assessments on real property;
(3) liens for an obligation to the United
States of America, a state or any of its political subdivisions; and
(4) any other lien on property imposed by law
for the security of an obligation.
(4)
Resident and nonresident
deductions distinction abolished. Effective for estates of decedents
dying on or after July 1, 1983, the domicile of the decedent is not relevant in
determining whether a liability is deductible in computing the net estate. In
the case of
In re Estate of Evans, 246 Iowa 893, 68 N.W.2d 289
(1955) applies only to estates of decedents dying prior to July 1, 1983.
However, the amount of the liability that is deductible depends upon the situs
of the property in the gross estate.
If part of the property included in the gross estate has a
situs in a jurisdiction other than Iowa, only a pro rata amount of the
liabilities specified in Iowa Code section
450.12, with the exception of
liabilities secured by a lien on property, is deductible in computing the net
estate for Iowa inheritance tax purposes. The amount deductible is computed by
multiplying the total amount of the unsecured liabilities by a fraction of
which the Iowa situs property in the gross estate is the numerator and the
total gross estate is the denominator.
Liabilities secured by a lien on property are allocated to
the state of situs. If the secured liability exceeds the value of the security,
any excess is prorated in the same manner as an unsecured liability.
This rule is intended to implement Iowa Code sections
450.7(1),
450.12,
450.22,
450.24, 450.38,
450.89,
633.278, and
633.374.
