Estate Debts and Expenses: 2022 Proposed Regulations

On June 24, 2022, Treasury and the IRS released proposed regulations under Section 2053, providing guidance on the proper use of present-value principles in determining estate deductions for funeral expenses, administration expenses, and certain claims against the estate. These regulations also address the deductibility of certain interest expenses and amounts paid under personal guarantees.

The proposed regulations clarify rules on the deductibility of interest expense accruing on taxes and penalties owed by the estate, interest on loan obligations incurred by the estate, requirements for substantiating the value of claims against the estate, and amounts paid under a personal guarantee by the decedent. Each of these areas involves complex requirements for documentation and substantiation.

A key feature of the proposed regulations is the application of present-value principles. An estate must make a present-value calculation if a deductible claim or expense is not paid within three years of the decedent's death. The regulations provide a formula that uses the applicable federal rate as the discount rate, and the estate must submit a supporting statement showing how the present value was calculated.

These regulations complete the framework established in 2009 for determining estate tax deductions. Estate administrators and their advisors should carefully review these rules to ensure compliance and to maximize available deductions. Understanding how to properly document and substantiate expenses is critical to minimizing estate tax liability.