- quote -

The problem is that you can't claim a marital deduction for
money that the surviving spouse doesn't get, and you can't
claim an estate tax deduction for administration expenses
that are claimed on the federal income tax return.

It's not that complicated, but kind of confusing, so let me
try to explain with an example.

Suppose the estate is $2,000,000, the unified credit
exemption amount is $1,500,000, and there are $40,000 in
administration expenses, leaving a net of $1,960,000 to
distribute.

If the unified credit trust is supposed to get $1,500,000,
then the surviving spouse gets $460,000. So, the federal
estate tax will show a $2,000,000 estate, a marital
deduction of $460,000, administrative expense deduction of
$40,000, and a taxable estate of $1,500,000, all of which is
exempt from tax due to the unified credit.

Now, suppose that the $40,000 is claimed on the income tax
return instead of the estate tax return. (See section
642(g).) According to the "Hubert" regulations under
section 2056, if the administration expenses are
"transmission expenses," then the estate available for the
marital deduction must be reduced. So you've still got only
$1,960,000 to distribute. If you distribute only $460,000
to the surviving spouse, then you've got a taxable estate of
$1,540,000 (because the $40,000 is not deductible) and the
$40,000 in excess of the $1,500,000 unified credit exemption
amount is going to result in federal estate tax. So you
have to distribute $500,000 to the surviving spouse in order
to eliminate the federal estate tax, which means that the
unified credit trust gets only $1,460,000.

So, where the $40,000 comes from is more a function of tax
law than what the will says (assuming that the will includes
a common form of marital deduction formula).

**Dan Evans
**I post information, not advice.

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- quote -

A layman's question: Since one goal is to have maximum
funding for the credit shelter trust, why wouldn't the trust
document say first fund the credit trust with the residue
going to the wife. Wouldn't the marital trust then take the
hit ?

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- quote -

What does the governing document say about where the
expenses are paid from? Typically, the expenses are to be
paid from the residue, which would then mean that the CST
will take the hit.

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raymond912002[at]yahoo.com (Raymond) wrote:

- quote -

It depends on where the fees are deducted.

If the fees are deducted on the federal estate tax return,
then the credit trust receives the full $1,500,000 (for
deaths in 2004).

If the fees are deducted on the federal income tax return,
then the credit trust receives only $1,460,000 (for deaths
in 2004).

This is based on the belief that the "fees associated with
settling the estate" are "transmission expenses" within the
meaning of Treas. Reg. section 20.2056(b)-4(d).

If the "fees associated with settling the estate" include
"management fees," then there might be a different result.
Treas. Reg. section 20.2056(b)-4(d).

**Dan Evans
**I post information, not advice.

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John Doe dies leaving a 3 million dollar estate. His trust
calls for a pecuniary formula distribution to a credit trust
equal to the Federal estate tax exemption with the balance
going to the marital trust. There are 40,000 dollars in fees
associated with settling the estate. Where would this money
come from? I am wondering if the credit trust will be fully
funded or will its formation have expenses allocated against
it?

Thank you.

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