In Estate of Martin W. Griffin v. Commissioner, T.C. Memo. 2025-47, a Tax Court denied the estate of a Kentucky decedent a marital deduction for a bequest, finding that it wasn’t qualified terminable interest property (QTIP) because a QTIP election wasn’t made. But the court allowed the marital deduction for a bequest intended to create a separate trust.
Trusts Created
Martin Griffin died on July 9, 2019, survived by his spouse, Maria Creel. Martin had created a revocable trust on March 8, 2012, and executed a second amendment to such trust on July 30, 2018. On July 30, 2018, Martin also created the MCC Irrevocable Trust (MCC Trust). The second amendment to the revocable trust agreement directed the following distributions:
• 2 million dollars to the trustee of the MCC Trust, to be held for Maria’s benefit. The trustee shall pay Maria a monthly distribution, not to exceed $9,000.
• $300,000 to the trustee of the MCC Trust, to be held as a living expense reserve for Maria, to be distributed to her in the amount of $60,000 per year for up to five years. Any undistributed amounts of this bequest on Maria’s death shall be paid to her estate.
The MCC Trust agreement contains provisions governing the terms of contributions to the trust:
3.1 Contributions to Trust; Withdrawal of Contributions. During the term of the trust, the Beneficiary shall have the right to make withdrawals with respect to Contributions made to the trust in accordance with the following:
A. Terms of Contributions. Any Donor to the Trust may specify whether the Beneficiary shall have any right to withdraw any of such Donor’s Contribution to the trust and the exact terms, conditions and timing of such withdrawal rights. The Donor may specify such terms regarding withdrawal rights in any manner reasonably acceptable to the Trustee…
The MCC Trust agreement included terms about the distribution of trust assets:
3.2. Administration of Trust Estate for Beneficiary. The Trust Estate held for the Beneficiary shall be administered and distributed such that upon the death of the Beneficiary, the Trustee shall distribute the remaining property subject to the Beneficiary’s broad limited power of appointment, otherwise to Beneficiary’s then living Descendants.
Notice of Deficiency
On Oct. 1, 2020, Martin’s executor filed an estate tax return, Form 706. Schedule M, Bequests, etc., to Surviving Spouse, attached to the return, didn’t list any property from the estate as QTIP. Schedule M, in the “All other property” section, listed a specific bequest of $2.3 million to Maria.
On June 27, 2023, the Internal Revenue Service issued a Notice of Deficiency to the estate. The Notice of Deficiency determined that each of the bequests was includible in Martin’s estate, and an estate tax deficiency of $1,047,398 was due.
Marital Deduction
On the death of a U.S. person, a tax is imposed on the taxable estate transferred to the decedent’s heirs. In computing the taxable estate, property passing to a surviving spouse is generally deductible under Internal Revenue Code Section 2056(a). The marital deduction doesn’t eliminate or reduce the tax on the transfer of marital assets out of the marital unit, but instead permits deferral until the death of the surviving spouse.
A marital deduction is typically not allowed for a terminable interest property passing from the decedent to the surviving spouse under Section 2056(b). A terminable interest is an interest passing from the decedent to the surviving spouse that will end on the lapse of time, the occurrence of an event or contingency, or on the failure of an event or contingency to occur. The terminable interest rule denies a marital deduction if:
1. An interest passing to the surviving spouse is a terminable interest,
2. An interest in such property passes to a non-spouse for less than full and adequate consideration, and
3. A third person will possess or enjoy the property after the termination or failure of the interest passing to the surviving spouse.
IRC Section 2056(b)(7) provides an exception to the terminable interest rule for QTIP. The provision allows a marital deduction for QTIP even though the surviving spouse receives only an income interest and has no control over the ultimate disposition of the property.
The IRC prevents QTIP from escaping the estate and gift tax regime by ensuring that the surviving spouse includes such property in her estate at death or pays a gift tax on it if transferred during lifetime.
The $2 Million Bequest
The parties agreed that the $2 million bequest is a terminable interest and therefore doesn’t qualify for the marital deduction unless it meets the requirements for an exception to the terminable interest rule. The only relevant exception is for QTIP. The estate didn’t make a valid QTIP election for the $2 million bequest on Form 706. Accordingly, the $2 million bequest isn’t QTIP and is includible in Martin’s estate as terminable interest property.
The $300,000 Bequest
Martin’s estate contended that the $300,000 bequest isn’t a terminable interest. As a non-terminable interest, the bequest would qualify for the marital deduction and be excluded from the estate. If the provision stating that on Maria’s death, any undistributed portion of the bequest would be paid to her estate is effective, then this bequest wouldn’t constitute a terminable interest because the property would pass in its entirety to her estate, and thus be subject to estate tax. If the provision wasn’t valid under state law, the bequest would pass to her descendants pursuant to the MCC Trust.
The estate successfully argued that the final provision of the bequest is effective under state law because the $300,000 bequest formed an estate trust separate from the MCC Trust. This means the bequest qualifies for the marital deduction and is excluded from the decedent’s estate.
Kentucky law requires the settlor of a trust to have the intention to create the trust. The Tax Court found that based on the use of the phrase “living expense reserve” and the specification of distinct distribution provisions that clearly conflict with the existing provisions of the irrevocable MCC Trust agreement, that Martin intended to create a trust with the $300,000 bequest and intended for that trust to be administered by the same person administering the MCC Trust. The $300,000 bequest qualifies for the marital deduction and isn’t a terminable interest because it will pass to Maria’s estate on her death.
Drafting Details
Estate of Martin W. Griffin v. Comm’r underscores the importance of careful drafting. Here, the use of the phrase “living expense reserve” and the differing distribution provisions from the existing irrevocable trust indicated that Martin actually intended to create a new trust administered by the same trustee as the irrevocable trust, as compared to the larger bequest that didn’t contain such precise language. The difference was $1 million of estate tax.
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