The U.S. Tax Court recently issued a memorandum opinion in Estate of Martin W. Griffin v. Commissioner, T.C. Memo. 2025-47, addressing the includibility of two bequests in the decedent’s gross estate for federal estate tax purposes. The case centered on whether two specific monetary bequests made through the decedent’s revocable trust to the trustee of his surviving spouse’s irrevocable trust qualified for the marital deduction under Internal Revenue Code (IRC) Section 2056. The dispute required the Court to apply the terminable interest rule and the Qualified Terminable Interest Property (QTIP) exception, as well as consider state law (Kentucky) regarding the creation and terms of trusts.

Background Facts

Martin W. Griffin (the decedent) died on July 9, 2019, survived by his spouse, Maria C. Creel. The decedent had established the Martin W. Griffin Trust (Revocable Trust) and later executed a Second Amendment to it on July 30, 2018. On the same day, he created the MCC Irrevocable Trust - 2018 (MCC Trust).

The Second Amendment to the Revocable Trust directed distributions to the Trustee of the MCC Trust for the benefit of Maria C. Creel. Two specific bequests were at issue:

$2 Million Bequest: A sum of $2,000,000 was to be distributed to the Trustee of the MCC Trust to be held for Ms. Creel’s benefit. The MCC Trustee was directed to pay Ms. Creel a monthly distribution, determined by Maria and the Trustee to be reasonable, not exceeding $9,000 (adjusted for CPI).
$300,000 Bequest: In addition to the $2 million, $300,000 was to be distributed to the Trustee of the MCC Trust to be held as a "living expense reserve" for Ms. Creel. This amount was to be distributed to her at a rate of $60,000 per year ($5,000 monthly) for up to 60 months. Crucially, the terms of this bequest stated that "[a]ny undistributed amounts of this Bequest upon Maria C. Creel’s death shall be paid to her estate.".

The MCC Trust itself was irrevocable and could not be amended, modified, or revoked by any person, other than amendments by the Trust Advisor. The MCC Trust agreement contained terms governing distributions upon the beneficiary’s death. Specifically, Section 3.2.B stated that upon the beneficiary’s death, the remaining trust property would be distributed to the beneficiary’s descendants as appointed by will, or if unappointed, to the beneficiary’s living descendants, or if none, to the Grantor’s descendants. Importantly, the MCC Trust agreement explicitly stated that "[i]n no event shall the Beneficiary appoint any part of the Trust Estate to the Beneficiary, to the Beneficiary’s estate, (emphasis added) to the Beneficiary’s creditors, or to the creditors of the Beneficiary’s estate.".

The decedent resided in Kentucky at death, and the executor resided in Kentucky when the Petition was filed. The estate timely filed Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, which listed a specific bequest of $2.3 million to Ms. Creel on Schedule M, Bequests, etc., to Surviving Spouse, under the section for "All other property" (non-QTIP). The return did not list any property from the estate as Qualified Terminal Interest Property (QTIP).

Respondent issued a Notice of Deficiency, determining that the $2 million and $300,000 bequests were includible in the decedent’s estate, resulting in a significant estate tax deficiency and accuracy-related penalty.

Procedural Posture

The case came before the Tax Court on cross-motions for partial summary judgment. Respondent moved for partial summary judgment arguing both bequests were includible, while the estate moved for partial summary judgment arguing both bequests qualified for the marital deduction. The parties agreed that summary judgment was appropriate as there was no genuine dispute as to any material fact regarding these two bequests. The Court’s role in a deficiency case is a de novo proceeding, based on the record before it, not the administrative record.

Relevant Legal Framework

The federal estate tax is imposed on the taxable estate of a U.S. citizen or resident. In computing the taxable estate, IRC Section 2056(a) generally allows a deduction for the value of property passing from the decedent to the surviving spouse. This marital deduction allows property to pass untaxed from the first spouse to die to the survivor, but the policy is that the property is then included in the surviving spouse’s estate.

However, IRC Section 2056(b), known as the terminable interest rule, generally disallows the marital deduction for an interest passing to the surviving spouse that will terminate or fail on the lapse of time, on the occurrence of an event, or on the failure of an event to occur. A terminable interest will be nondeductible if (1) it is a terminable interest, (2) an interest in the same property passes from the decedent to someone other than the surviving spouse for less than adequate consideration, and (3) that third person will possess or enjoy the property after the surviving spouse’s interest terminates. The purpose is to prevent avoidance of estate tax on the property in the surviving spouse’s estate.

An exception to the terminable interest rule is provided for Qualified Terminable Interest Property (QTIP) under IRC Section 2056(b)(7). QTIP allows a marital deduction even if the surviving spouse only receives a life income interest and has no control over the property’s ultimate disposition. The property passes to beneficiaries designated by the first-to-die spouse. To qualify as QTIP, three requirements must be met:

The property must pass from the decedent.
The surviving spouse must have a qualifying income interest in the property for life. This generally means the spouse is entitled to all income from the property, payable annually or more frequently, and no person has the power to appoint any part of the property to anyone other than the surviving spouse during her life [See § 2056(b)(7)(B)(ii)].
The executor must make an affirmative election to designate the property as QTIP on the estate tax return.

QTIP is included in the surviving spouse’s estate at death under IRC Section 2044 or is subject to gift tax if transferred during life under IRC Section 2519, ensuring the property is taxed within the marital unit.

Court’s Analysis and Application

A. The $2 Million Bequest

The parties agreed that the $2 million bequest was a terminable interest. Therefore, it would not qualify for the marital deduction unless it met the requirements for an exception, such as QTIP.

The Court focused on the third requirement for QTIP status: the executor’s affirmative election. The estate conceded it failed to evidence a QTIP election for the $2 million bequest on Schedule M of Form 706. The return listed this amount as "All other property" (non-QTIP).

The estate argued that the bequest might still be QTIP because the respondent did not raise the lack of election during the audit. The estate invited the Court to adopt a substantial compliance approach. The Court rejected this argument, stating that its proceeding is de novo and it generally does not look behind the Notice of Deficiency. Furthermore, the Court noted that respondent had no reason during the audit to point out the lack of a QTIP election when the estate’s position on the return was that the bequest qualified under other marital deduction rules.

Since no QTIP election was made, the Court held that the $2 million bequest is not QTIP. As a terminable interest not qualifying for an exception, it does not qualify for the marital deduction and is therefore includible in the decedent’s gross estate. The Court granted respondent’s motion for summary judgment on this point and denied the estate’s motion.

B. The $300,000 Bequest

The parties disagreed on whether the $300,000 bequest was a terminable interest under Kentucky law. If terminable, it would be includible (as the estate conceded no exception applies). If not terminable, it would qualify for the marital deduction and be excluded.

The key state law question was whether the provision in the bequest stating that "[a]ny undistributed amounts of this Bequest upon Maria C. Creel’s death shall be paid to her estate" was effective.

If effective, the property would pass entirely to her estate, making it a non-terminable interest qualifying for the marital deduction.
If void under Kentucky law, the undistributed amount would pass according to the default distribution provisions of the MCC Trust (to descendants, not her estate), making it a terminable interest.

The estate contended the bequest created a separate estate trust under Kentucky law, distinct from the MCC Trust, making the provision directing distribution to Ms. Creel’s estate effective and the interest non-terminable.

Respondent argued the bequest was a transfer to the preexisting MCC Trust. Because the MCC Trust was irrevocable and its terms prohibited appointment of trust property to the beneficiary’s estate, the provision in the bequest directing distribution to Ms. Creel’s estate upon her death was an ineffective attempt to modify the irrevocable MCC Trust terms and was therefore void. Under this view, the remainder would pass under the MCC Trust’s terms (to descendants), making it a terminable interest.

The central issue became whether the $300,000 bequest created a separate trust or was merely property transferred to the existing MCC Trust. The Court analyzed the requirements for trust creation under Ky. Rev. Stat. Ann. § 386B.4-020: (1) settlor capacity, (2) settlor intention to create a trust, (3) definite beneficiary, (4) trustee duties, and (5) trustee and beneficiary are not the same person.

The parties agreed that four of these requirements were met (capacity, definite beneficiary, trustee duties, separate trustee/beneficiary). The Court focused on whether the bequest language indicated the decedent’s intention to create a separate trust.

The Court found that the decedent did intend to create a separate trust for the $300,000 bequest. This conclusion was based on:

The use of the phrase "living expense reserve" for this specific bequest, implying a dedicated fund.
The specification of distinct distribution provisions upon Ms. Creel’s death (to her estate) that clearly conflicted with the existing provisions of the irrevocable MCC Trust agreement (explicitly not to her estate).
The contrast with the $2 million bequest, which did not use the "living expense reserve" phrase and did not include a provision for distribution of any remaining amount upon Ms. Creel’s death, indicating the $2 million was intended to be governed by the MCC Trust provisions.

The Court determined the decedent intended for the $300,000 bequest to be part of a legally distinct trust, albeit administered by the same person as the MCC Trust trustee. The Court rejected respondent’s argument that naming the trustee of the MCC Trust (by position) was conclusive evidence of intent to transfer property into the MCC Trust, especially given the conflicting distribution terms. Accepting respondent’s argument would nullify the decedent’s clearly stated intent for the remainder to pass to Ms. Creel’s estate.

The Court concluded that the $300,000 bequest created a trust separate from the MCC Trust. Since any remaining amount would pass to Ms. Creel’s estate upon her death, this separate trust interest did not constitute a terminable interest and therefore fully qualified for the marital deduction. This outcome aligns with the marital deduction policy of taxing the property within the marital unit, as it would be included in Ms. Creel’s estate.

With respect to the $300,000 bequest, the Court granted the estate’s motion for summary judgment and denied respondent’s motion.

Conclusion

The Tax Court granted respondent’s Motion for Partial Summary Judgment in part (regarding the $2 million bequest) and the estate’s Motion for Partial Summary Judgment in part (regarding the $300,000 bequest).

The $2 million bequest was held to be a terminable interest and includible in the gross estate because the estate failed to make the required affirmative QTIP election on the Form 706, despite it being a terminable interest.

The $300,000 bequest was held to qualify for the marital deduction and was not includible in the gross estate. The Court determined that under Kentucky law, the specific language creating this bequest, particularly the direction for any remaining funds to pass to the surviving spouse’s estate upon her death and the use of terms like "living expense reserve," demonstrated the decedent’s intent to create a separate trust, distinct from the existing MCC Irrevocable Trust, notwithstanding that the same individual was named as trustee. Because the property would pass to the surviving spouse’s estate, it was not a terminable interest under IRC Section 2056(b).

This case highlights the critical importance of clear drafting in trust documents and the necessity of strictly adhering to statutory requirements, such as making an affirmative QTIP election on the estate tax return, to ensure intended tax outcomes are achieved. It also underscores that state law rules regarding trust creation are paramount in determining the nature of property interests for federal estate tax purposes.

Prepared with assistance from NotebookLM.