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Funding the Estate Tax: Defusing the Liquidity Time Bomb

Tax

Any attempt to discuss the plethora of estate tax reform proposals pending in Congress at a given point in time is likely to prove an exercise in futility. It does, however, seem likely that the era of generous eight-digit estate tax exemptions is coming to a close. The leading reform proposals would reduce the estate tax exemption to $3.5 million and gift tax exemption to $1 million. These reductions would undoubtedly cause more taxpayers to face hefty estate tax bills at death. As planners, we not only assist our clients in reducing their estate tax liability to the greatest extent possible, but also in determining the least disruptive manner in which to satisfy such estate tax liability. In this article, we explore two options for mitigating the impact of the estate tax: deferral and financing arrangements.

Deferring Payment of the Estate Tax with a §6166 Election

An executor is generally required to pay a decedent’s estate tax liability nine months after the decedent’s death.[1] If, however, a significant portion of the estate consists of interests in one or more closely held businesses, the estate may qualify for an election under §6166[2] (a “6166 election”), which defers payment of the estate tax.[3] Section 6166 is intended to provide relief to an estate if the timely payment of estate tax would force the sale of a business enterprise in which the decedent held a large ownership interest.[4]

General Qualification Requirements — An executor may make a 6166 election if the estate includes a closely held business interest with a value exceeding 35% of the adjusted gross estate (35% AGE test).[5] Multiple closely held business interests may be aggregated for purposes of satisfying the 35% AGE test if each closely held business interest otherwise meets the requirements set forth below.[6]

An interest in a partnership or stock in a corporation will be treated as a closely held business interest for §6166 purposes only if 1) the partnership or corporation carries on a trade or business;[7] and 2) either the estate owns 20% or more in value of the capital interests of the partnership or voting stock of the corporation (the 20% ownership test) or the partnership or corporation has fewer than 45 partners or shareholders (the 45 owner test).[8]

Attribution rules, which may reduce the number of owners for purposes of the 45 owner test, apply 1) to treat stock or partnership interests held by a husband and wife as joint tenants or tenants in common as being held by one shareholder or partner;[9] 2) to treat property owned directly or indirectly by a corporation, partnership, estate, or trust as being owned proportionately by its shareholders, partners, or beneficiaries;[10] and 3) to treat a decedent as owning stock and partnership interests held by his siblings, ancestors, and lineal descendants.[11]

Example: Decedent, his spouse, and his three children all own interests in a partnership with 42 other partners — i.e., a total of 47 partners. The partnership would meet the 45 owner test because the family attribution rule treats the decedent, his spouse, and his three children as one partner for purposes of the 45 owner test.

Notably, these attribution rules do not automatically apply for purposes of the 20% ownership test. However, an estate may elect into the attribution rules if necessary to satisfy the 20% ownership test.[12] If an attribution election is made, the estate loses out on certain benefits otherwise available (i.e., no five-year deferral for the first principal installment payment and no 2% interest rate for a portion of the deferred tax (discussed below)).

Example: Decedent’s estate and decedent’s son each own 10% of the stock of ABC Corporation, and 48 unrelated shareholders own the balance of stock. The stock of ABC Corporation is not readily tradable. ABC Corporation will not meet the 45 owner test, but if the executor of the decedent’s estate elects to attribute the stock owned by decedent’s son to the estate, the 20% ownership test should be satisfied.

Effect of 6166 Election — If an executor makes a 6166 election, he or she may defer the payment of estate tax for five years, with the tax then paid in up to 10 equal annual installments beginning on the fifth anniversary of the due date of the estate tax return.

The maximum amount of estate tax that may be deferred is equal to the total estate tax due multiplied by a fraction, the numerator of which is the “closely held business amount” and the denominator of which is the adjusted gross estate.[13] The “closely held business amount” is equal to the aggregate value of the closely held business interests.[14] The adjusted gross estate is equal to the gross estate reduced by allowable deductions under §§2053 and 2054.[15]

Example: Decedent died with an adjusted gross estate of $100 million (after taking into account allowable deductions), consisting of $45 million of closely held business interests and $55 million of marketable securities. Decedent used his lifetime unified gift and estate tax exemption during his life. His estate tax liability is $40 million. $18 million of the tax is eligible for deferral under §6166 ($40 million x ($45 million / $100 million)).

In exchange for deferral, the IRS requires the estate to make annual interest payments on the deferred amount. A 2% rate of interest applies to a portion of the deferred tax (the 2% portion) equal to the estate tax rate multiplied by $1 million (adjusted annually for inflation). The interest rate on any amounts in excess of the 2% portion is 45% of the regular underpayment rate — which amounts to 1.35% based on the 3% underpayment rate for the second quarter of 2021.[16] Interest paid under §6166 is not deductible for either estate or income tax purposes.[17]

The executor must carefully administer the estate to avoid inadvertently triggering an acceleration of the payment of the entire deferred estate tax. The deferred estate tax may become due and payable if a portion of a closely held business interest is sold or a closely held business distributes funds to the estate that, in the aggregate, exceed 50% of the value of the business interest.[18] Certain redemptions are excluded.[19] In addition, the distribution of a closely held business interest to a revocable trust or another beneficiary of the estate under the terms of the decedent’s estate plan should not cause an acceleration event.[20]

The deferred tax may also become due and payable if the executor fails to pay a required installment under §6166[21] or otherwise obtain an extension of time to pay such installment.[22] The executor should be able to cure a default by paying the missed payment within six months of its due date,[23] plus a penalty in the amount of 5% of the payment, multiplied by the number of months (or fractions thereof) after the due date of the payment.[24]

Holding Company Election — Generally, holding company stock (i.e., stock in a corporation that holds stock of another corporation) that is not directly engaged in a trade or business does not qualify as a closely held business interest for purposes of §6166. However, an executor may elect to disregard holding company stock and treat the estate as owning the underlying business company stock directly.[25] The holding company election may be made only if all holding company stock is non-readily tradable (stock in the underlying business company may be readily tradable).[26]

Example: Decedent’s estate owns 50% of the stock of a holding company (Holdco). Holdco owns 80% of the stock of ABC Corporation, an active real estate business, and no other assets. Neither Holdco nor ABC Corporation are readily tradable. Holdco is not a closely held business interest for purposes of §6166 because all of its assets are corporate stock, which is treated as passive. The executor of decedent’s estate may elect, however, to treat the estate as directly owning the 80% interest in ABC Corporation.

If an executor makes a holding company election, he loses the initial five-year deferral period and the 2% preferential interest rate. Moreover, if the business company stock is readily tradable, the maximum number of installment payments is reduced from 10 years to five years.[27]

Passive Asset Limitations — For purpose of determining 1) whether the value of a closely held business interest included in the gross estate meets the 35% AGE test; and 2) the closely held business amount, the value of any “passive asset” owned by the business is disregarded.[28] Passive assets are defined as assets that are not used in carrying on a trade or business and, in many circumstances, stock in another corporation.[29]

Example: Decedent dies with an adjusted gross estate of $80 million, $40 million of which is attributable to cash and marketable securities, and $40 million of which is attributable to an interest in ABC Corporation, a closely held business. Twenty-five percent (25%) of ABC Corporation’s assets or $10 million are marketable securities not used in its trade or business. As a result, 25% of ABC Corporation’s assets (by value) are treated as passive for purposes of §6166. The value of decedent’s interest in ABC Corporation included in decedent’s gross estate, disregarding the passive assets, is equal to $30 million, only 30% of decedent’s adjusted gross estate, causing the interest to fail the 35% AGE test.

Stock in a corporation is a passive asset unless 1) the corporation is a holding company and the executor makes a holding company election or 2) the corporation meets the active corporation exception under §6166.[30]

Active Corporation Exception — Although a holding company election may get an estate out of the passive asset limitations with respect to stock owned by the holding company, such benefit comes at a cost — the loss of five years of deferral, the preferential interest rate charge and possibly a reduction in the installment term from 10 years to five years. If the holding company is directly engaged in an active trade or business (rather than a passive holding company), it may be possible to obtain the same benefits (i.e., treating holding company stock as a non-passive asset) without the costs. This active corporation exception applies if the following requirements are met: 1) both the holding company and its subsidiary corporation are engaged in an active trade or business; 2) the holding company owns at least 20% of the value of the voting stock of the subsidiary corporation; 3) at least 80% of the holding company’s assets (disregarding the stock in the subsidiary corporation) are used in an active trade or business; and 4) at least 80% of the subsidiary corporation’s assets are used in an active trade or business. If these requirements are met, all of the assets of the subsidiary corporation are deemed to be owned directly by the holding company for purposes of determining whether the value of the holding company stock included in the estate meets the 35% AGE test and the closely held business amount.[31]

Example: Decedent’s estate owns 50% of the stock of a holding company (Holdco). Holdco owns 60% of the voting stock of ABC Corporation and certain additional assets, all of which are used in Holdco’s active trade or business. Because Holdco owns at least 20% of the stock in ABC, and at least 80% of Holdco’s assets (disregarding the ABC stock) are used in Holdco’s active trade or business, Holdco and ABC should be treated as one corporation and, as a result, the ABC stock owned by Holdco should not be treated as a passive asset.

It is not clear whether or how the passive stock limitation, the active corporation exception and the holding company election apply to partnerships — specifically a partnership whose only asset is stock in one or more corporations. Under a literal reading of the statute, only a corporation may take advantage of the active corporation exception and the holding company election. However, we are not aware of any policy rational for treating a corporation and a partnership differently for these purposes.

Debt Financing with Graegin Loans

An estate facing a significant estate tax liability that is not eligible to make a 6166 election generally has two options to satisfy the estate tax liability — sell estate assets or borrow funds. It is often difficult or undesirable to sell the assets, particularly if the estate holds significant illiquid assets, resulting in a need to borrow funds. If properly structured, the estate may be able to deduct as an administrative expenses under §2053 all interest payments on the loan.

General Requirements for Deductibility of Interest Under §2053

Administrative expenses incurred in administering an estate are generally deductible on an estate tax return to the extent allowable under the laws of the jurisdiction in which the estate is administered.[32] Courts have long held that interest paid on loans used to pay estate tax is a deductible administrative expense.[33] Under more recent guidance, however, interest payments are deductible only if 1) the loan is actually and necessarily incurred; 2) the amount of interest to be paid is ascertainable with reasonable certainty; and 3) the loan is bona fide/has a non-tax purpose.[34]

Actually and Necessarily Incurred — An administrative expense is deductible only if it is actually and necessarily incurred in the administration of the decedent’s estate.[35] The courts and the IRS have generally concluded that a loan (and, therefore, the resulting interest expense) is reasonably and necessarily incurred in the administration of a decedent’s estate if the loan prevents the forced sale of assets, particularly when a sale would cause the estate to receive a reduced price for its assets.[36]

1) Liquidity of the Estate — Executor Deference: If an estate has sufficient liquid assets (e.g., cash or marketable securities) to pay its obligations, it is unlikely a loan obtained to pay estate tax will be viewed as reasonably and necessarily incurred. Although the estate’s liquid assets generally must first be used to satisfy the estate’s obligations, the regulations stop short of requiring “that an estate totally deplete its liquid assets before an interest expense can be considered necessary.”[37] Rather, courts give a significant amount of deference to the judgment of the executor as to the reasonable necessity of a loan.[38]

For example, in Estate of McKee v. Comm’r, T.C. Memo. 1996-362 (1996), the Tax Court deferred to the judgment of the executors in determining that a loan obtained to cover estate taxes was necessary. The estate, which consisted largely of stock in McKee Foods Corporation (McKee Foods), qualified for a 6166 election to defer estate taxes. The executors decided against making a 6166 election, and instead, borrowed $5,522,000 from McKee Foods. Subsequently, the executors borrowed that same amount from a third-party lender and repaid McKee Foods. McKee Foods later redeemed shares from the estate in exchange for a note with a payment schedule and interest identical to the terms of the third-party loan. The estate used payments received on this note to repay the third-party loan.

The court stated that it would not “second guess the business judgments of the executors,” finding the decision to borrow rather than defer to be prudent. McKee Foods was not able or required to redeem enough shares to provide the funds necessary to pay all estate taxes and the estate’s other actual or potential liabilities, and the executors would need to sell McKee Foods stock if a 6166 election had been made. By borrowing, the estate benefited from any increase in value of the McKee Foods stock.

In Estate of Murphy v. United States, 104 A.F.T.R. 2d 2009-7703 (W.D. Ark. 2009), the decedent formed a partnership during his lifetime, which he funded with stock in two publicly traded corporations and other assets. At the time of his death, decedent owned a 95.25365% interest in the partnership. The estate borrowed funds from the partnership to pay a portion of the estate tax. The IRS argued that the interest expense was not necessarily incurred because the partnership could have sold its publicly traded stock and distributed the proceeds to the estate. The court disagreed, stating that “if the executor acted in the best interest of the estate, the courts will not second guess the executor’s business judgment.”

2) Future Liquidity of the Estate: Interest is deductible only for the periods during which the executor reasonably anticipates that the estate will be illiquid. For example, in Estate of Howard Gilman v. Comm’r, T.C. Memo. 2004-286, an estate acquired short-term promissory notes in a tax-free reorganization with a face value well in excess of the estate’s estate tax liability. The estate obtained a 10-year loan from a bank to pay the estate tax. The short-term notes were set to mature well before the bank loan and there was no indication that the short-term notes would not be repaid. The Tax Court held that the estate’s period of illiquidity ended upon the repayment of the notes, only allowing a deduction for interest expected to be paid during that period.

In Estate of Duncan v. Comm’r, T.C. Memo. 2011-255, the Tax Court allowed an executor to deduct interest for the entire 15-year term of a loan even though the estate raised sufficient cash to repay the loan three years into the loan term. The Tax Court distinguished Estate of Gilman because the executors were not reasonably certain at the time of the borrowing that the estate would have enough liquidity to pay the estate tax within the 15-year loan term.

3) Loan Must Actually Prevent Forced Sale of Assets: An interest deduction is generally allowed if the loan was necessary to prevent the forced sale of assets. However, if a forced sale of assets is inevitable, the interest deduction may be disallowed. In Estate of Black v. Comm’r, 133 T.C. 340 (2009), the Tax Court addressed whether a loan was “necessary” when a partnership principally owned by the estate sold assets and loaned the sale proceeds to the estate to pay estate taxes. The decedent owned interests Black LP, a limited partnership, which held stock of Erie Indemnity Co., a publicly traded insurance company (Erie). His wife, who died shortly after him, also owned interests in Black LP. Their son was the executor of both estates. The estate tax due on the decedent’s estate was timely paid. However, given the illiquid nature of Black LP, the executor sought a loan to pay the estate taxes of the decedent’s wife. He was unable to obtain a loan from either a commercial lender or Erie and ultimately borrowed funds from Black LP. The executor then claimed the anticipated interest expenses as a deductible administrative expenses. Black LP was required to sell Erie stock to raise the cash needed to make the loan.

The IRS argued that the loan was unnecessary and the court agreed. The estate’s only significant assets were the Black LP partnership interests, and Black LP did not historically make income distributions to its partners sufficient to cover the loan payments. The court, therefore, assumed that Black LP would distribute the Erie stock to the estate in partial redemption of its Black LP partnership interests, and the estate would contribute the stock to Black LP in discharge of the note. This would put the parties in the exact same position they would have been in had the estate redeemed its Black LP interests for Erie stock rather than borrowing from Black LP. The distinguishing factor for the court appeared to be the fact that Black LP needed to sells its Erie stock to raise liquidity to make the loan in the first instance. And so the court found the loan to be unnecessary not because the estate could have sold the underlying stock, but because the underlying stock would need to be sold under any circumstance.[39]

Thus, in determining the deductibility of interest, it is important to evaluate whether the estate will generate sufficient income over the term of the loan to satisfy its obligations. If the estate’s only significant asset is stock in a corporation, a court will likely consider the corporation’s distribution history and patterns. If it is unlikely that the estate will receive enough income from corporate distributions to repay the loan, the court may find the loan to be unnecessary based on the rationale in Estate of Black — the assets of the corporation would need to be sold in any event.

Finally, it may be wise to limit any effective control that an individual serving as executor has over the closely held entity. The executor of the estate in Estate of Black argued that the estate had no right under the partnership agreement to require a distribution of the Erie stock as either a pro rata distribution or in partial redemption of its partnership interest. The Tax Court, however, noted the partnership agreement could be modified to allow for pro rata distributions of the Erie stock or a partial redemption of partnership interests, and that such a modification would not violate the fiduciary duties of the executor (in his capacity as managing partner of Black LP) to Black LP’s other partners.

Amount of Interest to be Paid Is Ascertainable with Reasonable Certainty — As with all deductible administrative expenses, interest must be determinable with reasonable accuracy and eventually paid in order to be currently deductible.[40] Thus, if the interest obligation is subject to fluctuating rates or there is a possibility that the loan payments will be accelerated, the interest is deductible only as payments are made.[41]

Estates often utilize a so-called “Graegin loan,” named for the 1988 Tax Court case, Estate of Graegin v. Commissioner, T.C. Memo. 1988-477, in an effort to secure a current deduction of the future interest expenses that will arise on a loan, the proceeds of which are used to pay estate taxes. In Estate of Graegin, the Tax Court held that all of the interest payable on a loan was immediately deductible as an administrative expense. Principal and interest was due under the loan at the end of a 15-year term (i.e., the life expectancy of the surviving spouse and when liquid assets would become available) and could not be prepaid. The court reasoned that the note was a genuine indebtedness and, based on its terms, the amount and the payment of the interest was ascertainable with reasonable certainty. Since Estate of Graegin, courts and the IRS have consistently permitted the immediate deduction of future interest payments on Graegin-type loans.[42]

A Graegin-type loan has the following terms: 1) fixed maturity (not to exceed anticipated period of illiquidity); 2) fixed interest rate; 3) prepayment prohibited; 4) interest payments accelerated and immediately due upon default; and 5) principal and interest payable over the term of the loan or as a balloon payment at maturity.

Bona Fide Debt/Non-Tax Purpose — To determine whether a debt is bona fide, “[t]he ultimate questions are whether there was a genuine intention to create a debt with a reasonable expectation of repayment and whether that intention fits the economic reality of creating a debtor-creditor relationship.”[43] In making such a determination, the courts focus on the identity of interest between the borrower and lender.

In Estate of Graegin, the Tax Court stated that “loans between a debtor and creditor having an identity of interest require close scrutiny; [however], such identity of interest per se is not fatal in characterizing the transaction as a loan.” The decedent’s trust owned shares in Graegin Industries, Inc., a closely held corporation (GI). To satisfy the estate tax obligation, the executors borrowed funds from Graegin Corporation, a wholly owned subsidiary of GI (GC). The decedent’s son served as co-trustee of decedent’s trust and co-executor of decedent’s estate, and was president and a member of the board of directors of GI and GC. The Tax Court found the loan to be bona fide based in part on 1) its terms (discussed above), 2) approval of the loan agreement by the probate court, and 3) the presence of some non-identity of interest (i.e., an unrelated shareholder owning approximately 3% of the GI stock, whom the court believed would likely complain if the loan was not timely paid).

Conversely, a loan is unlikely to be respected if there is complete identity of interest. In Technical Advice Memorandum 2005-13-028, the IRS considered whether a loan incurred to pay estate tax was bona fide. The estate borrowed from a partnership, which was owned entirely by the estate and one of its executors. Because “the same parties (closely related family members whose proportionate interests in the [e]state are virtually identical to their proportionate interests in the partnership) stood on both sides” of the transaction, the IRS concluded that the partnership’s assets were readily available to pay the estate tax and the loan’s sole purpose was to obtain an upfront estate tax deduction.

Accordingly, a loan is likely to be respected as bona fide if there is some non-identity of interest between the borrower and the lender. A loan from a commercial lender to an estate should be treated as bona fide on its face, whereas a court will closely scrutinize a loan from a corporation in which the estate owns a significant interest based on the identity of interest between the borrower and the lender.

In order for an estate to qualify for an interest expense deduction on a bona fide loan, the loan must benefit the estate and not its individual beneficiaries.[44] In Estate of Lasarzig v. Comm’r, T.C. Memo. 1999-307 (1999), the decedent died with a gross estate consisting primarily of the decedent’s living trust and a QTIP trust created by the decedent’s spouse. The living trust paid its share of the estate taxes, but the QTIP trust was unable to pay its share with its mostly illiquid real estate assets. The QTIP trustee distributed the real estate to the trust beneficiaries, who then each transferred the property to their own family trust. The family trusts borrowed money from a third party to cover the decedent’s estate tax obligation. The Tax Court determined that the interest expense on the loan was not deductible as an expense of administration because the borrowers (i.e., the family trusts) lacked a sufficient nexus with the estate, which itself had no remaining assets to administer at the time of the loan. The loan could not be an expense of administration of the empty estate. To avoid this result, it is important that the estate (or an entity having a close nexus with the estate) borrow the funds needed to satisfy the decedent’s estate tax liability.

Conclusion

With a major reduction in the estate tax exemption scheduled for 2026, and a possible earlier reduction if one of the Democratic legislative proposals becomes law, an increasing number of estates will be subject to estate tax. As executors grapple with increasing estate tax liabilities, we can expect to see a greater focus on opportunities for deferral or methods to mitigate the impact of the estate tax. It is important for estate planners to consider deferral strategies or at least ensure that lifetime planning does not negatively impact a client’s eligibility for deferral. Moreover, care should be taken to avoid structures that jeopardize eligibility for deferral or put pressure on the deductibility of interest.

[1] I.R.C. §6151(a). All references to “Section” or “§” are to sections within the Internal Revenue Code of 1986, as amended or the Treasury Regulations promulgated thereunder.

[2] I.R.C. §§6075(a), 6151(a); Treas. Reg. §26 C.F.R. §20.6151-1.

[3] The executor of an estate generally makes a 6166 election on a timely filed estate tax return (including extensions). I.R.C. §§6166(d); Treas. Reg. §20.6166-1(b).

[4] H.R. Rep. No. 2198, 85th Cong., 2d Sess. (1958).

[5] I.R.C. §6166(a).

[6] I.R.C. §6166(c).

[7] I.R.C. §6166(b)(1)(C). The IRS has defined this to mean a business entity carrying on a “manufacturing, mercantile, or service enterprise,” rather than mere management of passive investment assets. Tech. Adv. Memo. 8432007. See also Priv. Ltr. Rul. 8134012 (ruling that an estate was not eligible for deferral under §6166(a) where the decedent owned preferred stock in a holding company that owned all the stock of five operating subsidiaries because a corporation’s ownership of another corporation from which it obtains income only through such ownership, is not the carrying on of a trade or business).

[8] I.R.C. §6166(b)(1)(B).

[9] I.R.C. §6166(b)(2)(B).

[10] I.R.C. §6166(b)(2)(C).

[11] I.R.C. §§6166(b)(2)(D), 267(c)(4).

[12] I.R.C. §6166(b)(7).

[13] I.R.C. §6166(a)(2).

[14] I.R.C. §6166(b)(5).

[15] I.R.C. §6166(b)(6).

[16] I.R.C. §6601(j)(1)(B); Rev. Rul. 2021-6.

[17] I.R.C. §§2053(c)(1)(D); 163(k).

[18] I.R.C. §6166(g)(1).

[19] I.R.C. §6166(g)(1)(B).

[20] I.R.C. §6166(g)(1)(D).

[21] I.R.C. §6166(g)(3).

[22] I.R.C. §6161.

[23] I.R.C. §6166(g)(3)(B).

[24] I.R.C. §6166(g)(3)(B)(iii).

[25] I.R.C. §6166(b)(9)(A)(i). The definition of holding company and business company both refer only to a corporation, however, there does not appear to be any justification for excluding a partnership or a limited liability company as a holding company or business company for this purpose.

[26] I.R.C. §6166(b)(8)(B).

[27] I.R.C. §6166(b)(8)(B)(ii).

[28] I.R.C. §6166(b)(9)(A).

[29] I.R.C. §6166(b)(9)(B).

[30] Id.

[31] I.R.C. §6166(b)(9)(B)(iii).

[32] I.R.C. §2053(a)(2).

[33] See Estate of Huntington v. Comm’r, 36 B.T.A. 698 (1937); Estate of Bahr v. Comm’r, 68 T.C. 74 (1977).

[34] Discussed in subsections (i), (ii), and (iii).

[35] Treas. Reg. §20.2053-3(a).

[36] See Estate of Todd v. Comm’r, 57 T.C. 288 (1971) (“[T]he estate did not own any liquid assets at the time; and liquidation of non-probate assets only possible for reduced prices.”); Estate of Graegin v. Comm’r, T.C. Memo. 1988-477 (1988) (“to avoid a forced sale of its assets, the estate had to borrow money to satisfy its Federal estate tax liability”); Rev. Rul. 84-75, 1984-1 C.B. 193 (“the loan was reasonably and necessarily incurred in administering the estate” to avoid a forced sale of assets).

[37] See Estate of Thompson v. Comm’r, T.C. Memo 1998-325 (1998).

[38] See Estate of Gilman v. Comm’r, T.C. Memo. 2004-286 (2004) (“We do not substitute our judgment for decisions of the executors.”); Estate of Thompson v. Comm’r, T.C. Memo 1998-325 (1998) (“We are not prepared to second guess the judgments of a fiduciary.”); Estate of McKee, T.C. Memo. 1996-362 (“It is not our province, and we are not prepared, to second guess the business judgments of the executors.”); Estate of Sturgis v. Comm’r, T.C. Memo. 1987-415 (1987) (“[W]e are not prepared to second guess the judgments of a fiduciary.”); see also Estate of Murphy, 104 A.F.T.R. 2d 2009-7703 (“[T]he courts will not second guess the executor’s business judgment.”).

[39] See Estate of Duncan, T.C. Memo 2011-255.

[40] Treas. Reg. §20.2053-1(d)(4); Rev. Rul. 80-250, 1980-2 C.B. 278.

[41] See Estate of Bailly v. Comm’r, 81 T.C. 949 (1983); Estate of Bliss v. Comm’r, T.C. Memo. 1985-529 (1985); Hoover v. Comm’r, T.C. Memo. 1985-183 (1985) (all involving interest obligations subject to fluctuating rates); see also Estate of Graegin, T.C. Memo. 1988-477; Rev. Rul. 80-250, 1980-2 C.B. 278; Rev. Rul. 84-75; Priv. Ltr. Rul. 9952039; Priv. Ltr. Rul. 9903038 (all holding full amount of interest currently deductible because no possibility of acceleration of payment).

[42] See Priv. Ltr. Rul. 199952039 (fixed market rate of interest for 10-year term, interest payable annually, balloon payment of principal at maturity, prepayment prohibited, and all interest due upon default); Priv. Ltr. Rul. 199903038 (annual payment of principal and interest over specified period, fixed rate of interest, prepayment prohibited, total interest accelerated upon default); Estate of Duncan, T.C. Memo. 2011-255 (fixed interest rate, balloon payment of interest and principal at end of 15-year term, prepayment prohibited).

[43] Id.; Litton Business Systems, Inc. v. Comm’r, 61 T.C. 367 (1973).

[44] See Estate of Lasarzig, T.C. Memo. 1999-307.

Sebastian Orozco SegreraSebastian Orozco Segrera focuses his practice on domestic and international estate, gift, and income tax planning and compliance. He advises on a range of issues, including trust structures, pre-immigration planning, and estate planning, with a particular focus on taxation.

 

 

Nathan R. BrownNathan R. Brown, J.D., LL.M. (tax), is a partner in the private client practice group at McDermott Will & Emery in its Miami and Chicago offices. He is a former Dennis I. Belcher American College of Trust and Estate Council Young Leader (class of 2017-2019), a former fellow of the American Bar Association’s Section of Real Property, Trust & Estate (RPTE) Law Section (class of 2015-2017), and current chair of the Investment Entities Committee and vice chair of the Estate & Gift Tax Committee for RPTE. He is admitted to practice in Florida, Illinois, and Washington, D.C.

 

Melissa M. PriceMelissa M. Price, focuses her practice on domestic and international estate planning. She advises clients on estate, gift, and income tax issues, wealth transfer techniques, trust and estate administration, and charitable planning. She has significant experience with cross-border matters, including tax considerations for U.S. beneficiaries of foreign trusts, pre-immigration and expatriation planning, and pre- and post-death planning for foreign individuals with U.S. family members.

This column is submitted on behalf of the Tax Section, Harris L. Bonnette, chair, and Taso Milonas, Charlotte A. Erdmann, Daniel W. Hudson, and Angie Miller, editors.


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