Estate’s Right of Recovery Resolves Marital Deduction Controversy

Estate’s Right of Recovery Resolves Marital Deduction Controversy

U.S. Tax Court

The Tax Court held that an estate is not required to reduce its marital deduction by the amount of federal estate and state death taxes owed, finding that the estate must exercise its right of recovery under <a href="/research/federal/usc26/2207B" resolve="/lr/resolve/2207b/cp98" title="2207B">section 2207B</a> to prevent an outcome that is contrary to the decedent’s intent. Clyde Turner transferred assets to a family limited partnership in exchange for limited and general partnership interests. He then transferred portions of the limited partnership interests as inter vivos gifts. In its <a href="/lr/resolve//1s50q">initial opinion</a>, the Tax Court concluded that the value of assets transferred by Turner to the FLP during his lifetime was subject to <a href="/research/federal/usc26/2036" resolve="/lr/resolve/2036/cnvl" title="2036">section 2036</a> and, therefore, had to be included in his gross estate. In a <a href="/lr/resolve//vfzx">supplemental opinion</a>, the Tax Court held that the estate wasn’t entitled to a marital deduction regarding the value of property included in the gross estate because the property was the subject of lifetime gifts and did not pass to Turner’s surviving spouse. The IRS and the estate asked the court to resolve the continuing controversy surrounding the computation of the marital deduction under <a href="/research/federal/usc26/2056" resolve="/lr/resolve/2056/cnrn" title="2056">section 2056</a>. Specifically, the court addressed whether the estate must reduce the marital deduction by the amounts of the federal estate and state death taxes owed that the IRS claimed must be paid from estate assets passing to the surviving spouse (marital deduction property). Also at issue was whether the estate could increase the marital deduction by post-death income that was not included in the gross estate but was generated by marital deduction property. The IRS argued that the marital deduction must be reduced because the only property available to fund the federal estate and state death tax payments is property that would otherwise pass to Turner’s surviving spouse and qualify for the marital deduction. The estate disagreed, citing its section 2207B right of recovery. Judge L. Paige Marvel held that Turner’s estate need not reduce the marital deduction by the amounts of the federal estate and state death taxes it owes for three reasons: (1) those taxes are attributable solely to the value of property included in the gross estate under section 2036; (2) the executor has a right under section 2207B to recover from the beneficiaries who received the property during Turner’s lifetime an amount equal to the federal estate and state death taxes, plus interest attributable to those transfers; and (3) the executor must exercise the right of recovery under section 2207B to prevent the marital deduction property from bearing the estate’s tax burden contrary to Turner’s intent. The court also found that Turner’s estate may not increase the marital deduction by the amount of post-death income generated by the marital deduction property.

The Tax Court held that an estate is not required to reduce its marital deduction by the amount of federal estate and state death taxes owed, finding that the estate must exercise its right of recovery under section 2207B to prevent an outcome that is contrary to the decedent’s intent.

The Tax Court held that an estate is not required to reduce its marital deduction by the amount of federal estate and state death taxes owed, finding that the estate must exercise its right of recovery under section 2207B to prevent an outcome that is contrary to the decedent’s intent. Clyde Turner transferred assets to a family limited partnership in exchange for limited and general partnership interests. He then transferred portions of the limited partnership interests as inter vivos gifts. In its initial opinion, the Tax Court concluded that the value of assets transferred by Turner to the FLP during his lifetime was subject to section 2036 and, therefore, had to be included in his gross estate. In a supplemental opinion, the Tax Court held that the estate wasn’t entitled to a marital deduction regarding the value of property included in the gross estate because the property was the subject of lifetime gifts and did not pass to Turner’s surviving spouse. The IRS and the estate asked the court to resolve the continuing controversy surrounding the computation of the marital deduction under section 2056. Specifically, the court addressed whether the estate must reduce the marital deduction by the amounts of the federal estate and state death taxes owed that the IRS claimed must be paid from estate assets passing to the surviving spouse (marital deduction property). Also at issue was whether the estate could increase the marital deduction by post-death income that was not included in the gross estate but was generated by marital deduction property. The IRS argued that the marital deduction must be reduced because the only property available to fund the federal estate and state death tax payments is property that would otherwise pass to Turner’s surviving spouse and qualify for the marital deduction. The estate disagreed, citing its section 2207B right of recovery. Judge L. Paige Marvel held that Turner’s estate need not reduce the marital deduction by the amounts of the federal estate and state death taxes it owes for three reasons: (1) those taxes are attributable solely to the value of property included in the gross estate under section 2036; (2) the executor has a right under section 2207B to recover from the beneficiaries who received the property during Turner’s lifetime an amount equal to the federal estate and state death taxes, plus interest attributable to those transfers; and (3) the executor must exercise the right of recovery under section 2207B to prevent the marital deduction property from bearing the estate’s tax burden contrary to Turner’s intent. The court also found that Turner’s estate may not increase the marital deduction by the amount of post-death income generated by the marital deduction property.

Sec. 2056 Bequests, etc., to surviving spouse

Sec. 2036 Transfers with retained life estate

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Estate’s Right of Recovery Resolves Marital Deduction Controversy