The recent case of Moore v. Comm’r highlights the risk of the denial of an estate tax charitable deduction where the amount contributed to charity is either not ascertainable at the decedent’s death or is not required to be made under the applicable testamentary documents.
The decedent in this case created a living trust over which he retained complete power and control during his lifetime and, as a result, the assets of the trust were fully included in his gross estate. The living trust provided that upon the death of the decedent, the living trust should make a distribution to a charitable lead annuity trust—or CLAT—equal to “the smallest amount which, when transferred to the [CLAT] will result in the least possible federal estate tax being payable.”
The decedent also established an irrevocable trust during his lifetime, the assets of which were not anticipated to be included in the decedent’s gross estate. As a precautionary measure, the decedent had a provision in the trust requiring the trustee to distribute to the living trust “an amount equal to the value of any asset of [the irrevocable] trust which is includible in my gross estate for federal estate tax purposes.” However, the only way this provision could ever be triggered was by an IRS examination resulting in the decedent’s gross estate having to include any asset of the irrevocable trust.
During his lifetime, the decedent transferred his 1,000-acre farm to his living trust and continued to live on the farm, which was his principal residence. The living trust subsequently contributed the farm to a family limited partnership in exchange for a limited partnership interest. Although the decedent had no legal control over the partnership, or an ownership interest in any of its assets, the decedent continued to live on and control the farm, made a determination to sell the farm, and then negotiated the terms of the sale of the farm by the partnership to a third-party buyer. Even after the sale, the decedent continued to live on and work the farm until his death.
Inclusion of Farm in Decedent’s Estate
In a subsequent audit, the IRS determined that because the decedent kept possession and enjoyment of the farm until his death, IRC § 2036 required the farm to be included in his gross estate. The relevant issue at that point was whether the estate was entitled to an additional charitable deduction under the operative terms of the living and irrevocable trusts intended to minimize any additional estate tax resulting from the inclusion of the farm in the decedent’s gross estate.
The estate argued that an additional charitable deduction should be available because by including the farm in the decedent’s gross estate, the irrevocable trust was then required to transfer to the living trust “an amount equal to the value of any asset of [the irrevocable] trust which is includible in my gross estate for federal estate tax purposes” and the living trust was then required to transfer such amount to the CLAT to the extent necessary to minimize the estate tax. The IRS asserted that no additional charitable deduction was allowable because any additional transfer to the CLAT was “contingent on the IRS’s examination of the estate’s return.”
Determination by Tax Court
The Tax Court first upheld the IRS determination that Moore Farms should be included in the decedent’s gross estate under IRC § 2036. The court then, on the basis of two alternative grounds, upheld the IRS determination that the estate was not entitled to an additional charitable deduction.
The first was the very specific language of the irrevocable trust, under which a distribution was to be made to the living trust of “an amount equal to the value of any asset of this trust which is includible in my gross estate for federal estate tax purposes.” Although the farm was determined to be includible in the decedent’s gross estate for federal estate tax purposes, the court noted that the farm was not an asset of the irrevocable trust at the time of the decedent’s death but was owned by the buyers of the farm and that before its sale was as an asset of the limited partnership.
The second reason in support of its determination was that the transfer to the CLAT was not ascertainable at the decedent’s death. In this regard, the court cited case law specifically holding that a transfer to charity “must be ascertainable at the decedent’s date of death” in order to claim an estate tax charitable deduction, including Ithaca Tr. Co. v. United States finding that transfers to a charity must be “fixed in fact and capable of being stated in definite terms of money” and Estate of Marine. The court found that any transfer of additional funds to the CLAT “was not ascertainable at Moore’s death but only after an audit by the Commissioner, followed by a determination that additional property should be included in Moore’s estate, followed by either the successful defense of that position or the estate’s acquiescence to his determinations.”
Interestingly, in support of its position that it should be entitled to an additional estate tax charitable deduction, the estate sought to rely on the charitable lid formula clause cases of Estate of Christiansen v. Comm’r and Estate of Petter v. Comm’r. The court found those cases to be distinguishable because, here, a transfer of additional assets to the CLAT was “contingent upon an examination by the Commissioner.” In contrast, the court stated that in Estate of Christiansen and Estate of Petter, there was only a question as to how much the charities would receive.
Ninth Circuit Upholds Decision
In upholding the Tax Court decision, the Ninth Circuit confined its inquiry to whether any additional funds “were required by the Moore documents” to be transferred to the CLAT. The court stated that the provision of the irrevocable trust requiring a distribution to the living trust was triggered only by a determination that “any asset of this trust” was also an asset of the decedent’s gross estate. Here, the court noted that neither the farm nor its sale proceeds were assets of the irrevocable trust at the time of the decedent’s death. Instead, the proceeds of the farm sale were an asset of the limited partnership and that although the irrevocable trust had an interest in the limited partnership, the partnership agreement specifically provided that “no Partner shall have any interest in any of the assets of the partnership.”
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Richard L. Fox is a shareholder and attorney in the Philadelphia office of Buchanan Ingersoll & Rooney, PC, where he writes and speaks frequently on issues pertaining to philanthropic planning.
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