We have written before the importance of a property prepared Form 706 Estate (and Generation Skipping Transfer) Tax Return (“706”)[1] as well as the importance of a properly prepared Form 709 Gift Tax Return[2]. In our prior article discussing the 706, we highlighted a Private Letter Ruling (“PLR”) in which the Estate was granted a 120-day extension to make a QTIP election (discussed below). Unfortunately for the executor of the Estate of Martin Griffin, he found out first hand just how important it is to properly prepare the 706, as the Tax Court denied a marital deduction of $2M due to the failure to make a QTIP election.[3] The Estate did have a small win in allowing the marital deduction for a $300K bequest though that was not really affected by the preparation of the estate tax return.
Martin Griffin (“Griffin”) passed away in 2016, leaving behind a revocable trust he created in 2012, along with a second amendment to the revocable trust in 2018 (“Second Amendment”). In addition, Griffin created an irrevocable trust named the MCC Irrevocable Trust – 2018 (“MCC Trust”). In the Second Amendment, he directed the Trustee to do the following:
- The Trust shall distribute the sum of Two Million Dollars ($2,000,000.00) to the Trustee then serving as the Trustee of the [MCC Trust] (as the trust may be amended), to be held for the benefit of Maria C. Creel. From this bequest, the Trustee of the [MCC Trust] shall pay to Maria C. Creel a monthly distribution, as determined by Maria and Trustee to be a reasonable amount, not to exceed $9,000.00 (such $9,000.00 to be adjusted, from the initial funding date, by a factor for the Consumer Price Index, as reasonably determined by the Trustee, in his sole discretion).
- In addition to sub-part (a) above, the Trustee shall distribute the sum of $300,000.00 to the Trustee then serving as the Trustee of the [MCC Trust] (as the Trust may be amended), to be held as a living expense reserve for Maria [C.] Creel, to be distributed to her in the amount of $60,000.00 per year ($5,000.00 monthly) (plus earnings on such amount as determined by Trustee), for up to 60 months from the time of the initial funding of this Bequest. Any undistributed amounts of this Bequest upon Maria C. Creel’s death shall be paid to her estate.
The primary issue was whether the $2M bequest qualified as a QTIP trust and thus was eligible for the marital deduction. In my prior article, I discussed the requirement that in order for a bequest to qualify for the marital deduction under IRC Sec. 2056, it must pass the terminable interest rule, designed to deny the marital deduction for bequests that are structured to escape estate tax at the surviving spouse’s death. In general, property passing to a trust is considered a terminable interest to which the marital deduction does not apply.[4] However, there are a number of exceptions whereby the surviving spouse has a qualifying income interest in the property and the property is included in the surviving spouse’s estate, the most common being a QTIP Trust under IRC Sec. 2056(b)(7) which is discussed in my prior article, with one of the requirements being that the executor affirmatively elects QTIP treatment on the 706 for the predeceased spouse’s estate.
Schedule M to the 706 is where you list property that is eligible for the marital deduction. There are two places to list property on the Schedule M. First, Box A, now just line 4, is for “QTIP property”, and the second, Box B, now line 8, is for “All other property”, now “non-QTIP Property”.
The way to make the QTIP election is by listing property in Box A or the QTIP property section. The QTIP election is not made for property listed on Box B, now just line 8 and called non-QTIP Property. That’s exactly what happened in the present case as well as in the PLR discussed in my prior article. I suspect that executor here could have sought relief under Section 9100 and gone through the lengthy and costly PLR process, but for whatever reason that is not what happened. Instead, the Executor argued substantial compliance and harmless error in that QTIP property was listed in Box B instead of Box A by mistake. However, the Court was not having it and quickly held that no QTIP election had been made as to the $2M property, and thus no marital deduction was allowed. The Court noted that there were some questions as to whether the bequest even qualified for QTIP treatment, but it was not necessary to go there since no election was made. It ended there for the Estate.
Next, the Court moved on to the $300K bequest, where the Estate favored better. The IRS argued that the bequest failed as an ineligible terminable interest under IRC Sec. 2056(b)(1) since it was passing to the MCC Trust and could not be paid out to the surviving spouse’s estate at her death. However, the Estate argued, and the Court agreed, that the bequest created a new trust that had the same Trustee as the MCC Trust, but was not actually to the MCC Trust itself. Since the terms of the new trust provided that the assets were solely for the surviving spouse, and any balance would be paid to her estate at her death, the bequest did not violate the terminable interest rule under 2056(b)(1) and thus was eligible for the marital deduction as a non-terminable interest. Not being a terminable interest, no QTIP election was required. Accordingly, the Court held that the $300K bequest did qualify for the marital deduction.
It appears in this case that a number of missteps were made along the way, both in the language of the Second Amendment leaving a gray area as to whether the bequests were made in a manner that qualified for the marital deduction, to the improper preparation of the 706, and perhaps, not seeking Section 9100 relief via a PLR to make a late QTIP election (assuming the bequest even qualified for QTIP treatment in the first place). Seeking competent tax counsel perhaps could have mitigated this on the front end, after death, or on the back end after the 706 had been filed. Either way, the premise of how important a properly prepared 706 is stands in addition to other insights that can be gleaned from this case.
[1] https://esapllc.com/the-importance-of-a-properly-prepared-form-706/
[2] https://esapllc.com/importance-of-709-2022/
[3] Estate of Griffin v. Commissioner, TC Memo 2025-47
[4] IRC Sec. 2056(b)(1)
