Taxing Lessons From Court Decisions

Decisions — Can they do that?

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Image source: Walter Montgomery [Public domain], via Wikimedia Commons
Image source: Walter Montgomery [Public domain], via Wikimedia Commons

According to the wisdom of Dr. Seuss, only you can control your future. In the less insightful realm of taxes, wills and trusts attempt to provide a way of controlling the future by authorizing specific actions to be taken after death.

In T.C. Summary Opinion 2016-67 (Harvey C. Hubbell Trust), a trust was established under terms of a will that contained specific provisions about payouts to beneficiaries. The trust was created in 1960 to direct the distribution of a $2 million estate. Under one provision of the will, payouts to the beneficiaries were set at what was, at the time, a generous $100 per month for life. Those were the only payments expressly permitted to be made before the death of the last beneficiary.

Under a separate provision of the will, once the last beneficiary died, the trust was authorized to distribute the remaining assets over a period of no longer than 10 years in a way that would make the distributions free of state inheritance taxes and federal estate taxes. Alternatively, after the death of the last beneficiary, the trust could choose to establish a foundation.

From 1960 through 2009, the trust made the annual distributions to the beneficiaries as required. During those years, the trust also made contributions to charities and claimed deductions for those contributions on the annual trust tax returns.

In 2009, the trust claimed a charitable contribution deduction of $64,279.

The IRS disallowed the deduction. While agreeing the contribution met the requirements to be deductible (internal revenue code section 170(c)), the IRS said the contribution was not made according to the terms of the governing document (in this case, the will that created the trust). According to the IRS, no provision in the will authorized the payment of charitable contributions from the trust in any year.

The trust says that even though the will does not contain the exact wording that allows charitable contributions, the intention was for the trust to be able to make the contributions. As proof, the trust points to the authorization for the trust to choose to continue for 10 years after the death of the last beneficiary, as long as the remaining assets were distributed in a way that would make the distributions “free of state inheritance taxes and federal estate taxes.” The trust also points to the authorization to create a foundation after the death of the last beneficiary.

As additional proof, the trust produced an opinion reached by a probate court in 2014. Though the tax court does not have to follow the probate court decision, the probate court judgment stated that the language of the will “authorizes, and has from the inception of the trust authorized, the trustees of the trust to make distributions of income and principal for charitable purposes specified in internal revenue code section 170(c), or the corresponding provision of any subsequent federal tax law, both currently and upon termination of the trust.” The probate court based the decision on the ability of the trust, after the death of the last beneficiary, to continue distributing assets in a way that was free of state inheritance or federal estate taxes for 10 years or to create a foundation.


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Note: Taxing Lessons provides a summarized version of sometimes lengthy court decisions. The full case may include facts and issues not presented here. Please use the link provided in the post to read the entire case.

This information should not be considered legal, investment, or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment, or tax advice. Always consult your legal, investment, and/or tax advisor regarding your personal situation.


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Right answer!

For the IRS.

In the construction of a will, the testator’s intention must be ascertained from the words of the will. The will makes no provision for the payment of any charitable contributions before the death of the last beneficiary. During that period, the only payments from net income expressly permitted to be made by the trust are the annual annuity payments specified.

It is not until after the death of the last beneficiary, when the trust terminates, that the trustees are permitted to continue the trust, and to use and distribute unused income and the remainder of the principal for a purpose “exempt from state inheritance and federal estate taxes and for no other purpose.”

We find that the will provides that the annuity payments are the only payments that can be made from net income before the death of the last beneficiary. We further find that the will provides, in effect, that no charitable contributions are to be made until after the death of the last beneficiary.

Therefore, the charitable contributions made by the trust during 2009 were not made pursuant to the will, the governing instrument, and they are not deductible.

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