Academic journal article Journal of Accountancy

QTIP Deduction Allowed despite Accumulation Clause in Trust

Academic journal article Journal of Accountancy

QTIP Deduction Allowed despite Accumulation Clause in Trust

Article excerpt

George and Lavedna Ellingson set up an irrevocable trust governing the disposition and management of their property during their lives and after their deaths. They also were the initial trustees of the trust. On George's death, the trust instrument directed the trust property to be distributed to three smaller trusts. One of these, the "marital deduction trust," contained the family farm and is the subject of this dispute.

Lavedna and her son were the trustees of that trust, which provided for the entire net income to be distributed to Lavedna. However, an accumulation provision said if income exceeded the amount the trustees deemed necessary for Lavedna's "needs, best interests and welfare," then the trustees had the discretion to accumulate the income. The trust instrument further said George and Lavedna's intention was the marital deduction trust property "may qualify" for the qualified terminable interest property (QTIP) deduction and "shall only" be taxed in the estate of the second spouse to die.

George's estate made a QTIP election for the marital deduction trust property and claimed the estate tax marital deduction for it. The IRS denied the QTIP deduction, and the Tax Court upheld the denial. Assessed taxes for the property were more than $8 million.

IRC section 2056(b)(7)--the QTIP provision--contains the rules for one category of property qualifying for an estate tax marital deduction. …

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