Death, Taxes, and Child Support
James F. Cote, Esq.
Published in the Santa Barbara Law Journal, December 2003
We all know that death and taxes are inevitable. But how many attorneys know their impact on child support? The issues can be as complicated and confusing as death itself. This article will discuss using child support obligations as a deduction for estate tax purposes.
Let us use the following facts: Husband and Wife enter into an MSA, which is promptly incorporated into a Judgment. They have a 14-year-old, Son. Husband agrees to pay the following child support: Monthly support of $2,000, until Son is 19 years old; and all expenses for Son to go to college - tuition, books, room, board, transportation, etc.
When Son is 15 years old, Husband dies and leaves a substantial estate. So, how much of the child support is deductible for estate tax purposes?
Child support obligations survive the death of the supporting spouse. Taylor v. George (1949) 34 Cal.2d 552, 556. They are asserted as a Creditor’s Claim against the estate. Dobler v. Arlak Med. Ctr Indis. Group (2001) 89 Cal.App.4th 530, 540.
Once the amount of the Claim is established, the estate will want to maximize the Claim as a deduction for estate tax purposes. The test to determine whether this Claim is deductible is this: How much of the support obligation could have been ordered by the court, and how much of it was really a gift? Further, under IRC §2516, when an MSA is approved by the court within three years after it is signed, the child support payments are deductible if they are a “reasonable allowance for the support of issue of the marriage during minority.”
Monthly Support: Under Family Code §§3900 and 3901(a), the duty of support continues until the age of 18, or, if the child “is a full-time high school student, and who is not self-supporting, until the child completes the 12th grade or attains the age of 19, whichever occurs first.” Assuming Son will turn 19 after high school graduation, the post-graduation monthly payments will be a gift because they are not “during minority” and could not have been ordered by the court.
College Expenses: A California parent is not legally obligated to put a child through college. Therefore, these expenses are generally not deductible. Rosenthal v. Commissioner of Internal Revenue(1953) 205 F2d 505; Estate of Wiedeman v. Commissioner of Internal Revenue, 26 TC 565, 569-570 (1956). However, if Wife “bargained for” the college expenses, and gave up some of her own property and/or support rights to obtain that support, then the extra payments are supported by “adequate and full consideration” and are deductible. Leopold v. United States, 510 F2d 617 (1975); Glen Est. v. Commission of Internal Revenue, 45 TC 373 (1966).
The amount of the deduction is limited to the value of the property and support rights released by Wife. For example, in Glen Est. v. Commission of Internal Revenue, supra, the wife relinquished rights worth $333,000. The present value of the payments to her was $190,131. The difference of $143,202 was allocated toward the value of the “extra” payments due her three adult children. The balance of the payments in excess of $143,202 was considered a gift. Id. at 345-347.
In conclusion, if an MSA calls for child support beyond high school graduation, care should be exercised to document the bases for that support. Upon the death of a supporting spouse, attention must be given to maximize the deductibility of such payments for estate tax purposes.
Death, Taxes, and Child Support