Estate Tax Reduced for Terrorist Victims

Doug H. Moy
October 7, 2008 — 1,416 views  
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Estate Tax Reduced for Terrorist Victims

By: Doug H. Moy

Copyright © 2008 by Doug H. Moy. All rights reserved

Section 2201 of the Internal Revenue Code ("IRC;" "Code") provides that the maximum federal estate tax rate for a decedent who is any specified terrorist victim is 20 percent, as compared with a maximum rate of 45 percent for all other decedents [IRC § 2201(c)]. The term any specified terrorist victim means any decedent who dies as a result of wounds or injury incurred as a result of the terrorist attacks against the United States on April 19, 1995, or September 11, 2001, or who dies as a result of illness incurred as a result of an attack involving anthrax occurring on or after September 11, 2001, and before January 1, 2002. The term does not include any individual identified by the Attorney General to have been a participant or conspirator in any such attack or a representative of such an individual [IRC § 692(d)(4)]. These provisions also apply to any astronaut whose death occurs in the line of duty, except that the date of the death of the astronaut is used rather than September 11, 2001.

The U.S. District Court for the Central District of California has held that emotional suffering arising out of the September 11 attacks ultimately resulting in the decedent’s death by suicide does not constitute a "wound or injury" for purposes of IRC Section 2201(b)(1)(B) [Estate of Prasana Kalahasthi v. United States, No. 2:07-cv-05771 (D.C. C.D. Cal. July 7, 2008)]. Prasana Kalahasthi’s husband was killed when one of the hijacked airplanes crashed into the World Trade Center. Five weeks later, under emotional distress, Prasana committed suicide. The court opined that "injury," as used within the meaning of IRC Section 692(d)(4), means physical injury; and that emotional distress and resulting suicide is not within the meaning of "[death] as a result of wounds or injury incurred as a result of the terrorist attacks against the United States on April 19, 1995, or September 11, 2001, or ...[death] as a result of illness incurred as a result of an attack involving anthrax occurring on or after September 11, 2001, and before January 1, 2002." Accordingly, Prasana was not a specified terrorist victim within the meaning of IRC Section 692(d)(4).

In general, the effect of IRC Section 2201 is to replace the federal estate tax that would otherwise be imposed with a federal estate tax equal to 125 percent of the maximum state death tax credit determined under IRC Section 2011(b) as in effect prior to its repeal by the Economic Growth and Tax Relief Reconciliation Act of 2001 [Pub. L. No. 107-16, 107th Cong., 1st Sess. (7 June 2001)] ("2001 Tax Act"). The unified credit of IRC Section 2010 applies to reduce (or eliminate) the amount of the estate tax payable.

The reduction in federal estate tax under IRC Section 2201 is equal in amount to the additional estate tax with respect to the estates of decedents dying before January 1, 2005. The additional estate tax is the difference between the federal estate tax imposed by IRC Section 2001 and 125 percent of the maximum state death tax credit determined under IRC Section 2011(b). With respect to the estates of decedents dying after December 31, 2004, IRC Section 2201 provides that the additional estate tax is the difference between the federal estate tax imposed by IRC Section 2001 and 125 percent of the maximum state death tax credit determined under IRC section 2011(b) as in effect prior to its repeal by the 2001 Tax Act.

The personal representative of an estate that is eligible for special estate tax treatment under IRC Section 2201 may elect not to have IRC Section 2201 apply to the estate. Thus, if an estate may receive more favorable treatment without the application of IRC Section 2201 in the year of the decedent’s death than it would under IRC Section 2201, the personal representative may elect not to apply the provisions of IRC Section 2201; and the estate tax owed (if any) would be determined pursuant to the generally applicable rules [Joint Committee on Taxation’s Technical Explanation of H.R. 2884, The Victims of Terrorism Tax Relief Bill of 2001 (Final Version), Fed. Est. & Gift Tax Rep. (CCH) (January 29, 2002), at I-44187 (hereafter Technical Explanation of H.R. 2884)].

As amended, IRC Section 2201 no longer reduces federal estate tax by the amount of the additional estate tax. Instead, the federal estate tax liability of eligible estates is determined under IRC Section 2001 (or IRC Section 2101, in the case of decedents who were neither residents nor citizens of the United States), using a rate schedule that is equal to 125 percent of the present-law maximum state death tax credit amount [IRC § 2201(c); Technical Explanation of H.R. 2884, at I-44187]. This rate schedule is used to compute the tax under IRC Section 2001(b) or Section 2101(b) [i.e., both the tentative tax under IRC Section 2001(b)(1) and Section 2101(b) and the hypothetical gift tax under IRC Section 2001(b)(2) are computed using this rate schedule]. As a result of this provision, the estate tax is unified with the gift tax for purposes of IRC Section 2201 so that a single graduated (but reduced) rate schedule applies to transfers made by the individual at death, based upon the cumulative taxable transfers made both during lifetime and at death [Technical Explanation of H.R. 2884, at I-44187].

In addition, while an alternative reduced rate table (see "Rate Schedule" under IRC Section 2201(c)] is provided for purposes of determining the tax under IRC Section 2001(b) or Section 2101(b), the amount of the unified credit nevertheless is determined as if IRC Section 2201 did not apply, based upon the unified credit as in effect on the date of death. For example, in the case of victims of the September 11, 2001, terrorist attack, the applicable unified credit amount under IRC Section 2010(c) would be determined by reference to the actual IRC Section 2001(c) rate table. A conforming amendment repeals IRC Section 2011(d) because it no longer applies to taxpayers [Technical Explanation of H.R. 2884, at I-44187]. The provisions of the Victims of Terrorism Tax Relief Act of 2001 [Pub. L. No. 107-134, 107th Cong., 1st Sess. (23 January 2002)] apply to estates of decedents dying on or after September 11, 2001, or, in the case of victims of the Oklahoma City terrorist attack, estates of decedents dying on or after April 19, 1995 [IRC § 2201(d)(1)].

Doug H. Moy


Doug H. Moy is a nationally recognized author, consulting specialist, seminar instructor and educator. He has an undergraduate degree from Willamette University and a Masters degree from Washington State University. Since 1979, Mr. Moy has consulted to attorneys, tax practitioners and their clients, as well as assisted practitioners representing clients before the IRS Conference of Right and Appeals Division and Settlement Conference Negotiations. He is noted for his ability to communicate his unparalleled knowledge and experience to practitioners at all levels in his field of expertise; namely, estate/gift taxation and planning, with special expertise in living trusts; community property; lottery prize winnings; structured settlement trusts; extricating clients from abusive trust tax shelters; designing effective estate plans; and preparation of Form 706 Estate Tax Returns and 709 Gift Tax Returns. He offers particular assistance and exceptional skill designing creative, practical solutions to challenging and difficult estate planning situations.