CHAPTER XXXII DEDUCTIONS AND EXEMPTIONS § 264. Deductions Under the state laws certain deductions are made, which reduce the tax paid the state by reducing the amounts paid the residuary legatees. These deductions usually include the following: 1. Funeral and burial expenses 2. Allowances to family 3. Taxes due at time of death 4. Administration expenses 5. Expenses of necessary litigation § 265. Funeral and Burial Expenses Reasonable funeral and burial expenses may be deducted, it being considered that public policy dictates that every deceased person should be buried in a way suited to his former station in life. The amount paid for funeral expenses is subject to the approval of the court, the law prescribing merely that it must be reasonable in view of the circumstances of the case. If only the rights of legatees or heirs are involved, the rule is liberal, usually to the extent of allowing a monument or tombstone. But if the rights of creditors are affected, the courts often require that the funeral be plain and that there be neither monument nor tombstone. Funeral expenses include the undertaker's bill, the cost of the cemetery lot, and a suitable tombstone, and the cost of funeral services fitting to the station and religious faith of the deceased. They sometimes include an allowance for mourning to be worn by relatives of the deceased. It will be seen that there is no positive rule as to what is to be considered reasonable. In a case in Iowa the testator directed that $2,000, about one-third of his entire estate, be expended for a tomb and funeral expenses. The officers of the state objected to the deduction, "for the reason that it is of a purely personal and selfish nature," but the court sustained it as a lawful deduction.1 Another court might well hold that such a proportion was entirely unreasonable. § 266. Allowances to Family In most if not all of the states, certain property and usually some amount of ready money is set aside by law for the use of the widow and minor children. Whatever the statute allows for this purpose is deducted from the amount of the estate subject to transfer taxes. The specific articles must be set aside. Their value cannot be taken and deducted, and if they do not exist, no allowance or substitution is made. In New York, domestic animals and their food for sixty days are allowed. Few families are benefited by this provision at this time. No legislature has as yet in its wisdom allowed the bereaved family a Ford car and gasoline enough for three hundred miles. § 267. Taxes Due at Time of Death All taxes due at the time of death that would be valid claims against the decedent had he lived are to be paid as preferred claims and are allowed as deductions from the taxable estate. (See Chapter XXVI, “Paying Taxes Due.") In some states, e.g., Connecticut, Illinois, Minnesota, and New Jersey, the courts have decided that the amount due the 1 Morrow v. Durant, 140 Iowa 437. United States under the present federal inheritance tax law may be deducted. In New York it has been decided that the federal tax cannot be deducted.2 In Pennsylvania the courts decided that it could be deducted, but the legislature in 1919 declared that it was not to be deducted. The matter is in most states still uncertain. (See § 341.) Inheritance taxes levied in states other than the state of residence are allowed as deductions in some parts of the country. The highest court in New York refused to allow as a deduction the inheritance tax imposed by another state and the appeal of the executor was dismissed by the Supreme Court of the United States.3 § 268. Administration Expenses All legitimate expenses of administration are to be deducted, including reasonable fees to counsel. There should be a certain proportion between the fees paid the counsel and the amount of the estate. Counsel fees may be estimated and allowed in advance by the appraiser. The commissions paid executors can be deducted to the extent that they are allowed by law. Where a bequest is made to an executor in excess of his legal commission, the excess is taxable. (See also § 340.) § 269. Expenses of Necessary Litigation When executors have to fight a will contest, the expenses of such litigation are necessary and are properly to be deducted. In a case in Illinois the will was contested and the executors expended over $12,000 in defending it. This amount was allowed to them as a proper deduction, the amount involved being large. Other legatees interested in sustaining the will spent a like amount in employing counsel to assist but they 2 Matter of Sherman, 179 App. Div. (N. Y.) 497. Matter of Penfold, 216 N. Y. 171. were not allowed to reimburse themselves from the estate. Generally, litigation by the heirs is at their own cost and is not allowed as a deduction.5 § 270. Claims Against the Estate Any inheritance tax is levied on what remains after all debts have been paid, all expenses of administration paid, and the net value ascertained. The process of assembling claims has been described. (See Chapter XIV, "Assembling Claims and Paying Debts.") In New York and many other states, a legacy left to one who had a claim for services is taxable only on the excess above the legal claim. In other words, the claim is deductible from the estate before an inheritance tax is computed. In the settlement of the estate of Jay Gould, a legacy of $5,000,000 to George Gould in payment for services rendered. his father, extending over twelve years, was allowed as a deduction and made free of tax by the appellate division. The dissenting opinion of one judge was based on the ground that the legacy exceeded the legal claim, which was the fact. The case was taken to the court of appeals and reversed.8 Partnership debts are to be paid from partnership assets and so diminish the value of the partnership interest, but in no case are they to be deducted from the individual estate unless the firm is insolvent. § 271. Usual State Exemptions The usual exemptions under the state laws are: 1. Amounts under some maximum, usually $5,000 to $25,000, going to husband, wife, children, and other 'Connell v. Crosby, 210 Ill. 380. Lines' Estate, 155 Pa. St. 378. Matter of Enos, 61 Misc. (N. Y.) 594. 7 Matter of Gould, 19 App. Div. (N. Y.) 552. Matter of Gould, 156 N. Y. 423. near relatives. In some states amounts going to the immediate family are wholly exempt. 2. Amounts under some maximum, usually $500, going to more distant relatives and strangers to the blood. 3. Legacies to charitable, religious, and educational corporations incorporated in the state of domicile. "Children" would include formally adopted children but not stepchildren. In New York by statute "children" may include those standing in the mutually acknowledged relations of parent and child. This statute at times causes troublesome litigation. In New York at the present time bequests to foreign charitable corporations are exempt. The federal law taxes the estate as a whole and exempts all estates below $50,000 in value. (See Chapters XXXVII and XXXVIII.) REVIEW QUESTIONS 1. What deductions are made from the body of the estate under the state laws? Which legatees are affected by these deductions? 2. Who decides whether funeral and burial expenses are reasonable? 3. What is the allowance to the family in your state? 4. What taxes are allowed as deductions from the taxable estate in your state? In your state can the federal tax be deducted? 5. What are included in expenses of administration? If the estate totalled $100,000 and there was no litigation or special intricacy, what should counsel fees approximate? 6. When are expenses of litigation allowed? What factor would affect the amount so allowed? 7. What are valid claims against the estate? Can heirs or legatees have claims allowed for actual services rendered? 8. What are the exemptions in your state? Are adopted children. accounted as children? What is the general exemption in the federal law? |