- Estate of Kite v. Commissioner, T.C. Memo 2013-43
- March 11, 2013
- Law Firm: Proskauer Rose LLP - New York Office
The Tax Court held that a surviving spouse's sale of substantial entity interests to trusts for her children in exchange for a 10-year deferred private annuity was a valid transfer for full and adequate consideration because the value of the annuity had been properly valued using the actuarial tables under Internal Revenue Code Sec. 7520.
Mrs. Kite was the beneficiary of three trusts (two QTIP trusts, one marital deduction trust), which were liquidated and the entity interests they held transferred to her revocable trust. She then transferred the entity interests to her children in exchange for the annuity. Although the IRS argued that the transaction was a disguised gift because Mrs. Kite couldn't reasonably be expected to outlive the term and therefore had no expectation of actually receiving payment for the transferred interests, the Tax Court held that Mrs. Kite properly relied on the IRS actuarial tables to value the annuities, and noted that she even had a doctor certify that she was not suffering from an incurable illness at the time. The arrangement also did not result in Mrs. Kite retaining an interest in the transferred assets by way of the annuity, and so did not cause the assets to be pulled into her estate under Internal Revenue Code Section 2036.
However, the Tax Court did side with the IRS in finding that the termination of the marital trusts and the transfer of interests in exchange for the annuity was an integrated transaction. Accordingly, the transaction was a taxable termination of the QTIP trusts, resulting in a gift tax liability to Mrs. Kite calculated on the value of the trusts assets, less the value of her qualifying income interest therein.