Estate of Rose D. Howard, Deceased, Roger W. A. Howard, Volney E. Howard III, Alanson L. Howard, Robert L. Briner, Trustees, Petitioners v. Commissioner of Internal Revenue, Respondent, 91 T. C. 329 (1988)

A trust does not qualify as a QTIP trust if the income accumulated between the last distribution date and the surviving spouse’s death is not payable to the surviving spouse’s estate or subject to their power of appointment.

Summary

The Estate of Howard case addressed whether a trust qualified as a Qualified Terminable Interest Property (QTIP) trust under IRC Section 2056(b)(7). The trust provided quarterly income to the surviving spouse, but any income accrued between the last distribution date and the spouse’s death was to be distributed to remainder beneficiaries. The court held that such a trust did not meet QTIP requirements because the surviving spouse must be entitled to all income, including that accumulated between distributions, either directly or through a power of appointment. This ruling emphasizes the need for precise trust drafting to ensure compliance with QTIP rules, impacting estate planning strategies for utilizing the marital deduction.

Facts

Decedent Rose D. Howard received an income interest in a trust established by her late husband, Volney E. Howard, Jr. The trust terms directed quarterly income payments to Rose, but any income accumulated or held undistributed at her death was to pass to the trust’s remainder beneficiaries. Howard’s estate had elected to treat the trust as a QTIP trust on its estate tax return, claiming a marital deduction for the trust’s value. However, upon Rose’s death, the question arose whether the trust qualified as a QTIP trust given its provisions for undistributed income at the time of her death.

Procedural History

Howard’s estate initially elected QTIP treatment on its estate tax return and claimed a marital deduction. After Rose’s death, her estate argued the trust did not qualify as a QTIP trust and thus should not be included in her gross estate. The Commissioner disagreed, asserting that the QTIP election was valid. The case proceeded to the U. S. Tax Court, which ruled on the issue of whether the trust met the statutory requirements for QTIP status.

Issue(s)

1. Whether a trust qualifies as a Qualified Terminable Interest Property (QTIP) trust under IRC Section 2056(b)(7) if the income accumulated between the last distribution date and the surviving spouse’s death is not payable to the surviving spouse’s estate or subject to their power of appointment.

Holding

1. No, because for a trust to be a QTIP trust, the surviving spouse must be entitled to all income, including that accumulated between the last distribution date and their death, either directly or through a power of appointment. The trust in question failed to meet this requirement as it directed accumulated income to the remainder beneficiaries.

Court’s Reasoning

The court interpreted IRC Section 2056(b)(7) to require that the surviving spouse be entitled to all trust income, payable at least annually. The court emphasized that “payable annually” was a separate requirement from “entitled to all the income. ” It rejected the Commissioner’s argument that the surviving spouse need only receive all required payments during their lifetime. The court supported its interpretation by referencing the legislative history of Section 2056(b)(5), which uses similar language, and the regulations under Section 20. 2056(b)-5(f), which indicate that accumulated income must be subject to the surviving spouse’s control. The court also noted that Congress’s specific exception for pooled income funds implied a stricter rule for other trusts. The decision highlighted the need for meticulous drafting of trust instruments to comply with QTIP requirements.

Practical Implications

This ruling underscores the importance of precise trust drafting to ensure QTIP eligibility. Estate planners must ensure that all income, including that accumulated between distribution dates, is either payable to the surviving spouse’s estate or subject to their power of appointment. This may lead to more conservative drafting practices to avoid unintended tax consequences. The decision impacts how estate tax returns are prepared and how estates claim marital deductions. It also informs future cases involving QTIP trusts, reinforcing the principle that the surviving spouse must have full control over all trust income. This case serves as a reminder of the complexities and potential pitfalls in estate planning, particularly when utilizing QTIP trusts to maximize the marital deduction.