IN McDougall v. CommissionerThe Tax Court held that the amendment of a qualified terminable interest property (QTIP) trust resulted in the children (as remainder beneficiaries of the QTIP trust) making gratuitous transfers and subject to gift tax under sections of the Internal Revenue Code Internal. 2501 AND 2511.

QTIP Trust was amended

The decedent died in 2011 and her surviving spouse, as representative of the decedent's estate, made a QTIP election under IRC Section 2056(b)(7) to treat a $54 million remainder trust as a QTIP trust. In 2016, the husband and the couple's two surviving children agreed to reverse the QTIP trust and distribute all of its assets to the husband. The husband sold some of the assets received into new trusts for the benefit of the couple's children in exchange for promissory notes.

The commutation resulted in gifts to the spouse

The husband and each of the children filed 2016 gift tax returns reporting that there were no taxable gifts made due to offsetting reciprocal gifts made to each other, and the Internal Revenue Service issued a notice of deficiency alleging: (1) the amendment of the QTIP trust resulted in gifts from the husband to the children under IRC section 2519 and (2) the settlement resulted in gifts from the children to the husband of the remainder interests in the QTIP trust under IRC section 2511- of. The Tax Court dismissed the former claim, but agreed with the latter and held that the agreement to amend the QTIP trust resulted in gifts from the children to the husband under section 2511.

Annenberg Applied Precedent

The Court expressly acknowledged that it was applying the holding in the recent case of Estate of Annenberg v. CommissionerNo. 856-21, 162 TC (May 20, 2024) to hold that the surviving spouse did not make a gift as a result of the QTIP trust amendment because he was placed in the same position he would have been if the trust property had been distributed directly to him him on the death of his wife and not the QTIP trust. However, the court held that the children made gifts to the spouse by relinquishing their residual interest in the QTIP remainder trust and receiving nothing in return.

The court did not agree with the husband's argument that no gift occurred because all parties were in the same economic situation before and after the transactions in question. The court noted that the children's remainder interests in the trust would have been included in their estates if they had not agreed to the set-off, a different economic position that is illustrative of the gift transfer each made when the trust The QTIP was fully terminated in favor of the surviving spouse.