SCOTUS Reports

Tag: Spousal Election

  • Estate of Harper v. Commissioner, 93 T.C. 368 (1989): When Property in an Inter Vivos Pour-Over Trust Qualifies for Marital Deduction

    Estate of W. L. Harper, Deceased, Fred R. Veith, Coexecutor and Robert O. Edington, Coexecutor, Petitioner v. Commissioner of Internal Revenue, Respondent, 93 T. C. 368 (1989)

    Property transferred to an inter vivos trust pursuant to a residuary pour-over provision in a decedent’s will qualifies for the marital deduction as qualified terminable interest property (QTIP) despite the surviving spouse’s election to take against the will.

    Summary

    W. L. Harper’s estate involved a residuary pour-over to an inter vivos trust, with his surviving spouse, Florence W. Harper, as a lifetime income beneficiary. Upon Harper’s death, Florence elected to take her statutory share under Kentucky law, rather than under the will. The issue before the U. S. Tax Court was whether the trust assets qualified for the marital deduction as QTIP. The court held that under both Kentucky and Ohio law, Florence’s election did not affect her beneficial interest in the trust, and thus the property ‘passed from the decedent’ to her, qualifying for the deduction. This ruling underscores the independent nature of inter vivos trusts and their distinct treatment from testamentary trusts under state law.

    Facts

    W. L. Harper died testate in Kentucky, survived by his wife, Florence W. Harper. Harper’s will included a pour-over provision directing the residue of his estate to an inter vivos trust he established in 1978, naming Florence as the lifetime income beneficiary. After Harper’s death, Florence elected to take against the will under Kentucky law, opting for her statutory share. The estate claimed a marital deduction for the value of the property transferred to the trust, asserting it was qualified terminable interest property (QTIP). The Commissioner disallowed the deduction, arguing that the election voided Florence’s interest in the trust.

    Procedural History

    The estate filed a petition in the U. S. Tax Court after the Commissioner determined a deficiency in estate taxes due to the disallowed marital deduction for the trust assets. The Tax Court, after considering the applicable state laws of Kentucky and Ohio, ruled in favor of the estate, allowing the marital deduction for the trust assets as QTIP.

    Issue(s)

    1. Whether property transferred to an inter vivos trust pursuant to a residuary pour-over provision in a decedent’s will ‘passes from the decedent’ within the meaning of I. R. C. sec. 2056(b)(7)(B)(i)(I) despite the surviving spouse’s election to take against the will.

    Holding

    1. Yes, because under the applicable state laws of Kentucky and Ohio, the surviving spouse’s election against the will did not affect her beneficial interest in the inter vivos trust, and thus the property ‘passed from the decedent’ to her as required for QTIP status.

    Court’s Reasoning

    The court examined Kentucky and Ohio statutes to determine the effect of Florence’s election on her interest in the trust. Kentucky law allows a surviving spouse to elect against a will and take a statutory share, but does not preclude additional benefits from a trust if provided by the will or inferable from it. Ohio law similarly validates pour-over trusts and treats them as separate from the will. The court relied on the Ohio Court of Appeals decision in Carnahan v. Stallman, which held that a spouse’s election against a will does not affect rights under a pour-over inter vivos trust. The court also noted that the trust’s minimal initial funding did not undermine its validity or independent nature. The court concluded that Florence’s beneficial interest in the trust remained intact despite her election against the will, and thus the trust assets qualified for the marital deduction as QTIP.

    Practical Implications

    This decision clarifies that assets in an inter vivos pour-over trust can qualify for the marital deduction as QTIP even if the surviving spouse elects against the will. Practitioners should carefully consider the independent nature of inter vivos trusts when planning estates, especially in states with similar statutory provisions. The ruling may influence estate planning strategies, encouraging the use of such trusts to ensure tax benefits while allowing the surviving spouse flexibility in their election. Subsequent cases like Carnahan and Lorch have applied similar reasoning, while legislative changes in Ohio post-decision reflect an intent to clarify and possibly limit the impact of this ruling. Estate planners must stay apprised of state-specific statutory changes that could affect the application of this case.

  • Estate of Fannie Bomash v. Commissioner, T.C. Memo. 1971-138: Inclusion of Community Property in Estate with Retained Life Estate

    Estate of Fannie Bomash v. Commissioner, T.C. Memo. 1971-138

    When a surviving spouse elects to transfer her community property share into a testamentary trust established by her predeceased husband, while retaining a life income interest in the entire trust, a portion of her community property is includable in her gross estate under Section 2036, reduced by consideration received.

    Summary

    Fannie Bomash elected to take under her husband Louis’s will, which placed their community property into a trust. Fannie received a 50% life income interest in the trust. The Tax Court addressed whether Fannie’s share of the community property, now in the trust, was includable in her estate under Section 2036, and if so, whether she received consideration to offset this inclusion. The court held that Fannie made a transfer with a retained life estate, triggering Section 2036 inclusion. However, the court also found that the life income interest Fannie received from her husband’s share of the community property constituted consideration, partially offsetting the includable amount. The court ultimately determined that approximately 26.06% of the trust corpus was includable in Fannie’s estate.

    Facts

    Louis and Fannie Bomash were married and resided in California, a community property state. Louis’s will purported to dispose of the entire community property, placing it into a trust. Under the trust terms, Fannie was to receive 50% of the trust income for life, with the remainder to their children and grandchildren. Fannie signed an election to take under the will, agreeing to its terms. Upon Louis’s death, the community property was transferred to the trust. Fannie received income from the trust until her death. For Louis’s estate tax purposes, the entire community property was included in his gross estate under the then-applicable 1942 Revenue Act.

    Procedural History

    The IRS determined a deficiency in Fannie Bomash’s estate tax, arguing that a portion of the trust corpus was includable in her estate under Section 2036 because she had transferred her community property share to the trust while retaining a life income interest. The Estate of Fannie Bomash petitioned the Tax Court to contest this deficiency.

    Issue(s)

    1. Whether Fannie Bomash’s election to take under her husband’s will and transfer her community property share into the testamentary trust constituted a “transfer” under Section 2036.
    2. If so, whether Fannie retained a life income interest in the transferred property, thereby triggering inclusion under Section 2036.
    3. If Section 2036 applies, whether the life income interest Fannie received from her husband’s share of the community property constituted “consideration” under Section 2043(a) to reduce the includable amount.

    Holding

    1. Yes, Fannie’s election constituted a “transfer” of her community property share.
    2. Yes, Fannie retained a life income interest in the transferred property because she received income from the trust that included her transferred property.
    3. Yes, the life income interest Fannie received from Louis’s share of the community property was consideration under Section 2043(a), reducing the includable amount, but not eliminating it entirely.

    Court’s Reasoning

    The court reasoned that under California community property law, Fannie had a vested, equal interest in the community property. By electing to take under Louis’s will, she acquiesced to the testamentary disposition of her share, effectively transferring it to the trust. This transfer was made when she signed the election, even though it became effective upon Louis’s death and probate of his will. The court cited Mildred Irene Siegel, 26 T.C. 743 (1956), affirming that such an election constitutes a transfer by the wife.

    Regarding retained life estate, the court found that Fannie retained a 50% income interest in the entire trust, which included her transferred property. This retention of income triggered Section 2036. The court rejected the IRS’s argument that Fannie effectively retained 100% of the income from her contributed property, noting the trust was a single, indivisible entity.

    On consideration, the court acknowledged that Fannie received a 50% life income interest from Louis’s share of the community property. Following Vardell’s Estate v. Commissioner, 307 F.2d 688 (5th Cir. 1962), the court held that this income interest constituted consideration under Section 2043(a). The court distinguished this from a situation where the wife only receives income from her own transferred property, which would not be consideration. However, the consideration received was less than the value of the property transferred, leading to a partial inclusion. The court calculated the includable amount by reducing Fannie’s transferred share by the value of the consideration received, resulting in approximately 26.06% of the trust corpus being included in her estate.

    The court rejected the reciprocal trust doctrine argument, as Louis’s transfer was not made in exchange for Fannie’s transfer, but was a testamentary disposition of his property.

    Practical Implications

    Bomash clarifies the estate tax consequences of electing to take under a deceased spouse’s will in community property states, particularly when the will creates a trust funded with community property and the surviving spouse receives a life income interest. It establishes that such an election can be a transfer with a retained life estate by the surviving spouse, triggering estate tax inclusion under Section 2036. However, it also provides a crucial offset: the income interest received from the deceased spouse’s share of community property can be considered consideration under Section 2043(a), reducing the taxable amount. This case highlights the importance of carefully considering the estate tax implications of spousal elections in community property settings and structuring trusts to minimize unintended tax consequences. Practitioners should analyze the value of the consideration received to accurately calculate potential estate tax liabilities in similar situations. Later cases have applied Bomash to refine the valuation of consideration and the application of Section 2043 in community property trust scenarios.