Jun 1, 2006 12:00 PM, By T. Randolph Harris, partner, McLaughlin & Stern, LLP, New York

By: By T. Randolph Harris, partner, McLaughlin & Stern, LLP, New York

Most estate planners are aware that under Internal Revenue Code Section 642(g), estate administration expenses may be taken as estate tax deductions or income tax deductions — but not both.¹ In most taxable estates, that is to say estates where a federal estate tax is payable because there is no unlimited marital deduction and the estate is large enough (when combined with adjusted taxable gifts) to exceed the applicable exclusion amount, it traditionally has made sense to take administration expenses as estate tax deductions. That's because the marginal estate tax rate has usually been higher than the marginal income tax rates payable by the estate or its beneficiaries.

The situation is different when there is a surviving spouse and a marital/credit shelter formula structure in the will designed to fund a credit shelter trust with the maximum amount that will not generate a net estate tax. Then it appears at first blush that there is no value in taking expenses as estate tax deductions, because the estate tax is zero as a result of the formula. So some practitioners automatically take all the expenses as income tax deductions on Form 1041.

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