Estate of Morgens v. CIR

Summarized by:

  • Court: 9th Circuit Court of Appeals Archives
  • Area(s) of Law: Trusts and Estates
  • Date Filed: 05-03-2012
  • Case #: 10-73698
  • Judge(s)/Court Below: Circuit Judge Bea for the Court; Circuit Judge Berzon and District Judge George.
  • Full Text Opinion

“Gift taxes paid by the donee trustees of a Qualifying Terminable Interest in Property (QTIP) trust, based on a 26 U.S.C. § 2519 deemed inter vivos transfer of the QTIP property within three years of the donor’s death, must be included in the transferor’s gross estate under the so-called “gross-up rule” of § 2035(b).”

Mrs. Morgens and Mr. Morgens entered into the Morgens Family Living Trust Agreement, each contributing assets to a Living Trust. The Agreement provided that the remainder of a Residual Trust (that was eventually split) would be divided into shares for their offspring. The estate “elected QTIP treatment for the property passing to the Residual Trust.” Mrs. Morgens died within three years of her transfers of interests into the two Residual Trusts. But, the gift taxes for these transfers were not shown on her gross estate’s tax return. § 2035(b), the “gross-up rule,” requires that a gross estate be increased by the amount of gift taxes paid by the decedent or her estate within three years of her death. But if the marital deduction of § 2056(a) applies, the entire QTIP property is not included in the gross estate of the decedent. A transfer of the QTIP’s qualifying income interest is deemed to transfer the entire QTIP property, except the qualifying income interest. “§ 2207A gives the donor the right to recover the tax from the QTIP beneficiaries who receive the QTIP property transfer.” “Before the Tax Court, the Estate argued that the trustees paid the gift tax on the § 2519 deemed transfers.” Thus, the Estate appealed. A net gift being an arrangement where the gift is subject to the donee paying the resulting gift tax, the Court found that “the donor of a net gift uses the donee as a conduit for the payment of the tax liability.” Furthermore, “the payment of the gift taxes by the donee is taxable income to the donor.” AFFIRMED.

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