gavel and money

Estate Tax Refund of Almost $500,000 Ordered

Surrogate Court overrules the Tax Department’s penalty involving a Q-Tip trust established in 2010.

A recent New York Surrogate Court decision could have implications on qualified terminable interest property trusts.

In In the Matter of the Estate of Evelyn Seiden, Surrogate Rita Mella vacated a New York State Notice of Deficiency imposed against Evelyn Seiden’s estate and ordered the refund of nearly half a million dollars of New York estate taxes imposed on the QTIP trust that was established by Evelyn’s husband’s will following his death in 2010, during which there was a one-year federal estate tax repeal in effect.

Value of QTIP Trust Property Excluded on Tax Return

The case concerns the tax treatment of the QTIP trust in Evelyn’s estate, as the surviving spouse. According to the opinion, after Evelyn’s death in November 2014, her executor excluded the value of the trust property on the federal estate tax return on the basis that no federal marital deduction had been claimed or allowed in the husband’s estate, as is required to trigger inclusion in the second estate under Internal Revenue Code Section 2044. The Internal Revenue Service issued a closing letter, and the return was accepted as filed.

The estate also excluded the trust property on Evelyn’s New York estate tax return, relying on the position that New York Tax Law Section 954 defines New York gross estate by reference to the federal gross estate, which clearly excludes the property. The New York State Department of Taxation of Finance disagreed, however, and assessed additional tax in the amount of $462,546.18, taking the position that the relevant law is that which existed in 2010, at the time of Evelyn’s husband’s death.

Court Applies 2014 Law

The Surrogate Court disagreed with the Tax Department’s position, finding that the relevant law is that which existed in 2014, when Evelyn died and not 2010, because it’s the tax on the wife’s estate that’s at issue here. Furthermore, the court reasoned that even under the law as it existed prior to 2014, no federal marital deduction was allowed in the husband’s estate. For the deduction to be allowed as QTIP property, the court explained, it’s necessary that the executor make a particular election on the federal estate tax return in accordance with IRC Section 2056(b)(7). Evelyn’s husband’s executor made no such election because no federal estate tax return was required to be filed due to the then-effective repeal. Therefore, the Surrogate Court concluded that IRC Section 2044 doesn’t apply, the QTIP property isn’t included in Evelyn’s federal gross estate and the property isn’t included in the New York gross estate. 

Plain Language of the Statute

The Surrogate Court also dismissed the Tax Department’s various other arguments, including the Tax Department’s position that the New York State legislature always intended that marital deduction property be taxed in the estate of the second spouse to die, agreeing with Evelyn’s estate’s position that it’s entitled to rely on the plain language of the statute. The court also wasn’t swayed by the Tax Department’s argument that a decision vacating the deficiency in this case will “open the floodgates” to tax avoidance.

Further Implications

Robert Benjamin, a partner in Wiggin and Dana in New York City,and one of the attorneys who represented Evelyn’s estate matter, said “[w]e are pleased that the Surrogate agreed with our client’s position that the courts must apply the laws as written.” This favorable ruling is seemingly good news for all other estates with QTIPs created in the state during 2010, pending any legislative action to amend the New York Tax Law.

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