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Unlimited Marital Deduction

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1. Ann Miller RN MHA, on April 1, 2012 at 1:02 PM said:

   No Marital Deduction for Sec. 2036 Included Assets

   In Estate of Clyde W. Turner Sr. et al. v. Commissioner; 138 T.C. No. 14; No. 18911-08 (28 Mar 2012), the Tax Court considered a request for reconsideration of a prior decision including FLP assets in the estate under Sec. 2036(a). The Tax Court determined that the assets remained includable at full market value and did not qualify for a marital deduction.

   In the initial case on the Turner estate, the Tax Court determined that assets in the Turner & Co. family limited partnership (TFLP) would be includable at fair market value in the estate. They were includable because there was no legitimate and significant nontax reason for TFLP formation, Clyde Sr. retained an interest in the transferred assets and the purpose of Turner & Co. was primarily testamentary.

   After reviewing estate requests for reconsideration, the court determined that no new substantive evidence indicated that there was a significant nontax reason for creation of Turner & Co. Therefore, even though the family had potential tax savings and a grandson had a history of substance abuse, the court determined that there was no manifest error of fact and Sec. 2036(a) inclusion was applicable.

   The estate then claimed that the transfers should qualify for a marital deduction under a pecuniary formula clause. Clyde and Jewell Turner had jointly transferred $8.67 million to TFLP. Each held a 0.5% general partnership interest and a 49.5% limited partnership interests. Clyde had transferred 21.7446% of his limited partnership interests to various family members and passed away with his 0.5% general partnership interests and 27.7554% limited partnership interests.

   Clyde’s estate transferred 18.8525% limited partnership interests to a marital deduction trust and 8.9029% limited partnership interests to a bypass trust.

   The marital deduction formula provision of the will indicated that a pecuniary amount would be transferred that “will result in the smallest, if any, federal estate tax being imposed on my estate.” The estate claimed that proper interpretation of this marital deduction language enables the estate to deduct the transfer of the previously-gifted limited partnership interests.

   The court noted that a Section 2036(a) revaluation creates potential calculation issues in an estate. In this case, the IRS permitted the marital deduction trust to reflect the actual increase in value of the assets. However, the IRS denied a marital deduction for the increased value of the gifts to other family members.

   The court observed that a marital deduction is permitted for property that passes to a spouse under Sec. 2056(c). Under Reg. 20.2056(c)-1, the marital deduction qualifies “only if it passes to the spouse as beneficial owner.”

   In this case, Clyde’s gifts could not qualify because spouse Jewell did not actually receive the property. The gifted items were transferred to other family members.

   The marital deduction is also based on the principle that the assets transferred to any qualified marital deduction trust or other entity will be taxable in the spousal estate. For example, a transfer of assets to a qualified terminable interest property trust (QTIP) permits the use of the marital deduction, but trust assets will be includable in the estate of the surviving spouse under Sec. 2044.

   The requested interpretation by the estate was rejected. If the gifted assets were granted a marital deduction, they would not be taxed in the estate of the surviving spouse because they are held by other family members.

   Source: Children’s Home Society of Florida Foundation

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