THE TAXABLE ESTATE

Certain items discussed in this section are deducted from the gross estate to determine the adjusted gross estate and the taxable estate. The adjusted gross estate is the gross estate less the deductible: (1) Administrative and funeral expenses;

(2) Claims against the estate; and

(3) Casualty and theft losses.

The taxable estate is the adjusted gross estate less: (1) The marital deduction;

(2) The charitable deduction; and

(3) The specific exemption.

A. Administrative Expenses, Funeral Expenses, and Claims A deduction is allowed for amounts payable out of property subject to claims (generally, the probate assets) for:

(1) Funeral expenses;

(2) Administration expenses incurred in administering property subject to claims;

(3) Claims against the estate; and

(4) Unpaid mortgages and other charges against property, the value of which is included in the gross estate without reduction for the mortgage or other indebtedness.

The amount of the deduction is the amount paid for these expenses allowable under the local law governing the administration of the decedent's estate. The total deduction, however, is limited to:

(1) The value of property subject to claims included in the decedent's gross estate plus

(2) The amount paid out of property included in the gross estate but not subject to claims, if actually paid within the time allowed for the filing of the estate tax return (generally 9 months; 15 months if decedent died before January 1, 1971).

The determination as to which property is subject to claims and which property is not subject to claims is made under the applicable State law. If under State law, a particular property interest included in the decedent's gross estate would bear the burden for the payment of the expenses, then the property is considered "property subject to claims."

Administration expenses include commissions of the executor or administrator, fees of attorneys for the estate, court costs, selling expenses for selling estate property if these sales are necessary in settling the estate, and excise taxes incurred in these sales. Expenditures not essential to the proper settlement of the estate, but incurred for the individual benefit of the heirs, legatees, or devisees are not deductible.

If an item included in the gross estate is disposed of in a bona fide sale (including a redemption) to a dealer, an amount may be deducted as a selling expense that is the difference between the sale price and the fair market value of the item on the applicable valuation date, or on the date of the sale, whenever the difference is smaller.

Claims against the estate include property taxes accrued before the decedent's death, unpaid income taxes on income received by the de

decedent in his lifetime. Amounts that may be deducted as claims against a decedent's estate are only for enforceable personal obligations of the decedent at the time of his death. Deductions for claims founded upon promises or agreements are limited to the extent that the liabilities were contracted in good faith and for adequate and full consideration in money or money's worth. However, a pledge or subscription in favor of a public, charitable, religious, or educational organization is deductible to the extent that it would have constituted an allowable deduction had it been a bequest.

Amounts allowable as deductions under the provisions discussed in this subsection may not be used as deductions in computing the taxable income of the estate for income tax purposes unless the deduction for estate tax purposes is waived. However, selling expenses, such as brokerage fees for selling estate property, may be offset against the sale price of the property in computing the taxable income of the estate, and may also be deducted on the estate tax return as an administration expense.

B. Casualty or Theft Losses

Deductions are allowed for losses incurred during the settlement of the estate arising from theft or casualties, such as storms, fires, etc., but only to the extent that these losses are not compensated for by insurance or in another manner. No deduction is allowed from the gross estate for losses claimed for income tax purposes.

C. Marital Deduction

A deduction is allowed, subject to certain limitations, for the value of any property interest included in the gross estate that passes from the decedent to the surviving spouse.

The allowable marital deduction is limited to the smaller of the following amounts:

(1) The total value of the interests passing to the surviving spouse that qualify under the rules set forth in this subsection; or

(2) Fifty percent of the value of the decedent's adjusted gross

estate.

The marital deduction is allowed only for property interests actually passing from the decedent to his lawful spouse. No deduction is allowable for property passing to a former spouse. The parties are considered to have been married at the time of the decedent's death in spite of a prior ex parte divorce, if the divorce had been overturned by a court having personal jurisdiction over the spouses.

Property interests that pass from the decedent to his surviving spouse include any interest taken by her (a) as decedent's legatee, devisee, heir, or donee, (b) as decedent's surviving tenant by the entirety or joint tenant, (c) as appointee under decedent's exercise of a power or as taken in default upon his release or nonexercise of a power, or (d) as beneficiary of insurance upon the decedent's life.

If a property interest passes to the surviving spouse, subject to a mortgage or other encumbrance, or if an obligation is imposed upon the surviving spouse in connection with the passing of a property interest, only the net value of the interest after reduction by the amount of the mortgage or other encumbrance qualifies for the marital deduction. If the executor is required, under the terms of the decedent's

will or under local law, to discharge the mortgage or other encumbrance out of other assets of the estate, or to reimburse the surviving spouse, the payment or reimbursement constitutes an additional interest passing to the surviving spouse. Federal estate taxes or other death taxes that are paid out of the surviving spouse's share of the gross estate are not included in the value of "property interests passing to the surviving spouse.

Certain interests in property passing from the decedent to his surviving spouse are referred to as "terminable interests." Such an interest is one that will terminate or fail after the passage of time, or upon the occurrence or nonoccurrence of some contingency. Examples are: life estates, annuities, estates for terms of years, and patents. A terminable interest will not qualify for the marital deduction if another interest in the same property passed from the decedent to some other person for less than adequate and full consideration in money or money's worth and by reason of its passing, such other person or his heirs may enjoy part of the property after the termination of the surviving spouse's interest. As an example, assume that the decedent devised real property to his wife for life, with remainder to his children. The life interest that passed to the wife does not qualify for the marital deduction since it will terminate at her death and the children will thereafter possess or enjoy the property.

There are, however, three exceptions to the terminable interest rule. A property interest passing from the decedent to his surviving spouse is not treated as a nondeductible terminable interest if:

(1) It is a right to income for life with a general power of appointment meeting the requirements discussed below;

(2) It consists of life insurance or annuity payments held by the insurer with a general power of appointment in the spouse, meeting the requirements discussed below; or

(3) It is conditioned on the spouse's surviving for a limited period, in the manner described below.

A property interest passing from the decedent to his surviving spouse is considered a deductible interest if: (1) she is entitled for life to all of the income from the entire interest; (2) such income is payable annually or at more frequent intervals; (3) she has the power, exercisable in favor of herself or of her estate, to appoint the entire interest; (4) such power is exercisable by her alone and in all events (although it may be limited to exercise either during life or by will); and (5) no part of the interest is subject to a power in any other person to appoint to anyone other than the surviving spouse.

If either the right to income or the power of appointment passing to the surviving spouse pertains only to a specific portion of a property interest passing from the decedent, the marital deduction is allowed only to the extent that the rights in the surviving spouse meet all of the five conditions set forth above.

A property interest consisting of the entire proceeds of a life insurance, endowment, or annuity contract passing from the decedent to his surviving spouse is considered a deductible interest if: (a) she is entitled to receive such proceeds in installments, or is entitled to interest thereon, with all amounts payable during her life payable only to her; (b) such installment or interest payments are payable annually,

decedent's death; (c) she has the power, exercisable in favor of herself or of her estate, to appoint all amounts payable under the contract: (d) the power is exercisable by her alone and in all events (although it may be limited to exercise either during life or by will); and (e) no part of the amount payable under the contract is subject to a power in any other person to appoint to anyone other than the surviving spouse. If the foregoing five conditions are met only for a specific portion of the proceeds, the rules set forth above for a partial interest in property are applicable in determining the extent of the allowable deduction.

If a property interest passed from the decedent to his surviving spouse, subject to a provision that it was to pass to some other person if the spouse should fail to survive the decedent by 6 months (or by a shorter period), or if the decedent and his spouse should die as a result of a common disaster, the property interest is deductible if the spouse survived beyond the stated period or if the decedent and his spouse did not die as the result of a common disaster.

D. Charitable Deduction

A deduction is allowed for the value of property in the decedent's gross estate that was transferred by the decedent during life or by will to (or for the use of): (1) the United States or any of its political subdivisions; or (2) any corporation or association organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, as long as no benefit inures to any private individual and no substantial activity is undertaken to carry on propaganda, or otherwise attempt to influence legislation or participate in any political campaign on behalf of any candidate for public office; or (3) a trustee or trustees, or a fraternal society, order, or association operating under the lodge system, if the transferred property is to be used exclusively for religious, charitable, scientific, literary, or educational purposes, and no substantial activity is undertaken to carry on propaganda or otherwise attempt to influence legislation, or participate in any political campaign on behalf of any candidate for public office; or (4) any veteran's organization incorporated by an act of Congress (or any of its subdivisions) as long as no benefit inures to any private individual; or (5) a foreign government or its political subdivision when the use of such property is limited exclusively to charitable purposes.

The charitable deduction is also allowed for amounts that are transferred to the foregoing organizations as a result of an irrevocable disclaimer by a primary beneficiary of a bequest, devise, or transfer. The irrevocable disclaimer must be made before the date designated for filing the estate tax return; i.e., 9 months (15 months, if the decedent died before January 1, 1971) from the date of the decedent's death, or within any extension of time granted for filing the return. The deduction also includes the value of interests falling into such bequests by reason of the complete termination of a power to invade or consume for the benefit of an individual who dies within the same period, before the power has been exercised.

A charitable deduction is allowed for a charitable trust with remainder to a noncharitable entity, but only if the charity's interest is in the form of a guaranteed annuity or a fixed percentage of the

property, valued and distributed annually. The allowable deduction is the value of the income interest.

A charitable deduction will be allowed for certain remainder interests in property as well as for the other interests listed above. The future interest (except for a future interest in a personal residence or farm) must be in the form of a charitable remainder annuity trust, a charitable remainder unitrust, or a pooled income fund.

A charitable remainder annuity trust is a trust from which a specified amount (not less than 5 percent of the initial net fair market value of the property placed in trust) is paid annually to a noncharitable income beneficiary (who was living at the time the trust was created). At the death of the income beneficiary or at the end of a term of years (not greater than 20 years), the remainder interest must be paid to a qualified organization, described above. A charitable remainder unitrust is like an annuity trust except that a specified percentage, rather than a specified amount, is to be paid annually. This percentage cannot be less than 5 percent of the net fair market value of the trust assets, valued annually. To qualify as an annuity trust or unitrust, a trust must not make discretionary with anyone the amount to be paid to the noncharitable beneficiary. This rule applies even if the discretion is limited by ascertainable standards prescribed by the trust instruments. A pooled income fund is a trust set up by a charity to which a decedent transfers property and retains a proportionate income interest in all the property for the life of a beneficiary living at the time of the decedent's death.

Any other form of charitable remainder interest generally will not qualify for the charitable deduction. However, a charitable remainder included in the gross estate that is not an annuity trust or unitrust may nevertheless qualify for the deduction if the decedent died before October 9, 1972, and the remainder interest was created by a will that was in existence on October 9, 1969, and was not later modified, or if it was created by inter vivos transfer on or before that date. In such a case, the deduction will be allowed if there is no more than a negligible possibility that the charitable remainder will not become effective. Wills executed or trusts created before September 21, 1974, may be amended to allow qualification for the deduction if the governing instrument is amended or conformed before January 1, 1976 (or within 30 days after judicial proceedings, instituted before January 1, 1976, to amend or conform the governing instrument, before final).

The deduction is limited to the amount actually available for charitable uses. Thus, if under the terms of a will or the provisions of local law, or for any other reason, the Federal estate tax, or any other death tax, is payable in whole or in part out of property, the transfer of which would otherwise be allowable as a deduction as discussed in this subsection, the sum deductible is the amount of the transferred property in excess of the taxes in question chargeable thereto.

If the executor elects the alternate method, and the charitable bequest is expressed as a percentage of the gross estate, the charitable deduction will be the value of that percentage on the alternate valuation date.

E. Exemption

A specific exemption of $60,000 is allowed for the estate of each