In Kalikow v. Commissioner, 135 A.F.T.R.2d 2025-831 (March 4, 2025), the U.S. Court of Appeals for the Second Circuit upheld the Tax Court’s ruling on summary judgment motions regarding the estate tax treatment of a settlement payment owed by a qualified terminable interest property (QTIP) marital trust to the estate of the beneficiary widow.
Pearl Kalikow survived her husband, Sidney. Sidney’s will established a QTIP marital trust that held 10 properties. After Pearl’s death, the trustees of the QTIP trust reorganized the 10 properties into a family limited partnership. On Pearl’s death, the QTIP trust assets passed to her two children.
Meanwhile, Pearl’s estate ultimately passed to charity. On her death, her estate made a claim against the QTIP trust, asserting that she hadn’t been properly paid the net income from the QTIP trust, as required. The issue was settled, and the QTIP trust and estate agreed to pay over $6 million to Pearl’s estate to satisfy the claim.
The taxpayers argued that the value of the QTIP trust should be reduced by the claim payable to Pearl’s estate. However, the court explained that the QTIP trust assets were includible in Pearl’s estate, not the QTIP trust entity itself. The assets of the QTIP trust weren’t encumbered by the putative claim as of the date of death. A hypothetical purchaser of the assets of the QTIP trust wouldn’t reduce the purchase price of those assets by the QTIP trust’s obligation to back pay the net income. Because the liability didn’t affect the value of the underlying partnership owning the 10 properties, it wasn’t relevant to the valuation of the assets included in Pearl’s estate.
In the alternative, the taxpayers argued that the estates should deduct the $6 million settlement payment as an administrative expense. However, this argument wasn’t successful. The court held that, as to the estate, the $6 million payment was an asset or receivable, not an expense.
So, no adjustment was made to the QTIP trust, valued at almost $55 million, for estate tax purposes in Pearl’s estate.
Had the estate prevailed in this case, the QTIP trust would have been reduced by $6 million for estate tax purposes, and the $6 million received by Pearl’s estate would have qualified for the estate tax charitable deduction.