• Distributions of stock in a grantor retained annuity trust (GRAT) don’t trigger insider trading rules—In Nosirrah Management, LLC v. AutoZone, Inc. (W.D. Tenn. April 14, 2025), a district court held on summary judgment that an insider didn’t have to disgorge his profits from the sale of stock received from a GRAT.
The taxpayer, William Rhodes III, established a GRAT with shares of stock in Autozone, Inc. As an insider of Autozone, his transactions with the stock are subject to insider trading rules. Six months after the GRAT paid him his annuity in shares, he sold those shares for a profit. Another shareholder (Nosirrah Management LLC) brought a derivative action on behalf of the company to disgorge William’s profit.
Section 16(b) of the Securities Exchange Act permits a corporation to recover profits that insiders make on certain transactions. An insider, who owns more than 10% of any one class of the company’s securities, must have made a purchase and a sale within a 6-month period. However, there’s an exception for a transaction that’s only a “change in the form of beneficial ownership without changing a person’s pecuniary interest” in the securities.
Usually, funding a GRAT and receiving an annuity payment would constitute a sale and purchase, respectively, but a 1997 No-Action Letter issued by the SEC held that the creation of a GRAT and subsequent annuity payment to the grantor qualify for the “change in the form of beneficial ownership” exception.
Many GRATs include a so-called “swap” power in which the grantor is permitted to substitute assets of equivalent value with the GRAT. Prior case law in the Southern District of New York (Morales v. Quintiles Transnational Corp., 25 F. Supp.2d 369 (S.D.N.Y 1998) and Donoghue v. Smith, 2022 U.S. Dist. LEXIS 76071 (S.D.N.Y. April 26, 2022)) has held that exercising the swap power could be considered a purchase under the insider trading rules. In this case, the GRAT included a swap power, but the grantor didn’t exercise it. A preliminary 2024 Order in the case addressing evidentiary issues denied a motion to dismiss and indicated that the mere existence of the swap power, without exercise, could trigger the insider trader rules. Estate planners were particularly interested in seeing how this issue was resolved.
The final 2025 Order ruling on motions for summary judgment confirmed that the transaction qualified for the “change in beneficial ownership” exception. The court noted that William had an indirect beneficial interest in the securities through the GRAT. After the annuity payment, he had a direct interest in the securities. That change in beneficial interest, from indirect to direct, was in form only and qualified for the exception.
The 2025 Order didn’t mention the issue of the swap power, so there’s no definitive answer on this point, but it would appear that merely including a swap power isn’t problematic. However, cautious estate planners may still want to think carefully about the risks of including a swap power for insider trading.
• Analysis of marital deduction for bequests to an irrevocable trust for spouse—In Estate of Griffin, T.C. Memo. 2025-47 (May 19, 2025), the Tax Court examined two distributions from a decedent’s revocable trust to determine whether they qualified for the marital deduction. The court determined that one distribution qualified, while the other didn’t.
The decedent’s revocable trust made the distributions to an existing irrevocable trust (the MCC trust) for the benefit of the decedent’s surviving spouse, Maria.
First, the decedent’s revocable trust distributed $2 million to the MCC trust for Maria’s benefit, with an instruction to the trustees to make monthly payments to Maria for her benefit not to exceed $9,000. The MCC trust stated in general terms that on Maria’s death, the trustee must distribute the trust property to her descendants, and if none, to the grantor’s descendants, subject to a limited testamentary power to appoint the property among her descendants.
Second, the decedent’s revocable trust left $300,000 to the trustees of the MCC trust as a “Living Expense Reserve.” The terms of the bequest itself stated that the sum was to be distributed to Maria in fixed $60,000 annual payments over five years. If Maria didn’t survive the 5-year period, any remaining amounts were payable to her estate.
The executor of the decedent’s estate failed to make a qualified terminable interest property (QTIP) election for both distributions but claimed the
$2.3 million as direct bequests to Maria, which were eligible for the marital deduction on Schedule M.
The marital deduction isn’t available for interests that pass first to the spouse and then to another individual on some contingency or event. These are known as “terminable interests.” The marital deduction is intended to defer estate tax on assets that pass to the spouse until the spouse’s death, at which point the assets would be taxable in the surviving spouse’s estate. Because terminable interests pass to other individuals, they wouldn’t be includible in the surviving spouse’s estate and would escape estate tax. Certain terminable interests in trust qualify for the marital deduction, but a QTIP election must be made on the estate tax return for those interests.
No QTIP election was made for the $2 million bequest. The trust wouldn’t have qualified for a QTIP election because Maria wasn’t entitled to all the income. It didn’t qualify for the marital deduction either because it benefited Maria during her life and passed to others on her death.
However, the terms of the $300,000 distribution included a specific provision that the remainder of the bequest was payable to Maria’s estate. This, along with the other conditions of the bequest, contradicted the terms of the MCC trust and distinguished it from the $2 million bequest. The court considered the language of the $300,000 bequest to have actually created a separate trust under Kentucky law. The court concluded that the second distribution wasn’t a terminable interest because, unlike the first, it directed that the remainder pass to Maria’s estate. It was essentially a distribution to Maria, as the surviving spouse, which qualifies for the marital deduction by itself, without a QTIP election.
• Claim by stepchildren against an estate doesn’t qualify as a deductible debt/expense under Internal Revenue Code Section 2053—In Estate of Richard D. Spizzirri v. Commissioner (U.S.T.C. 60743 (May 16, 2025)), the U.S. Court of Appeals for the Eleventh Circuit upheld the Tax Court and determined that the estate couldn’t deduct a payment to a decedent’s stepchildren under a modified prenuptial agreement (prenup).
Richard Spizzirri and his fourth wife executed a prenup that they modified several times over the course of the marriage. Ultimately, Richard promised bequests of $6 million to her and $3 million to her children, which she accepted in lieu of any other marital rights. Eventually, the couple became estranged.
Richard amended his will by executing various codicils but didn’t provide for terms that complied with the prenup. When he died, his stepchildren filed claims in district court seeking payment pursuant to the prenup. A year later, the estate paid the children the amounts owed, plus penalties and deducted the payments as claims against the estate. The Internal Revenue Service denied the deduction and issued a notice of deficiency.
For a claim against an estate to be deductible, it must be contracted bona fide and for adequate and full consideration in money or money’s worth. The court found that the estate hadn’t shown evidence that the claim was bona fide, and the children weren’t parties to the prenup. Instead, it was essentially donative in nature, rather than arm’s length or made in the ordinary course of business. As a result, it didn’t qualify and wasn’t deductible.
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