Tax Court Rules How QTIP Trust Early Termination Gifts Are Valued

Full analysis

In Lewis v. Commissioner, the U.S. Tax Court settled how to calculate the taxable gift when remainder beneficiaries of a QTIP trust — a qualified terminable interest property trust, a common estate-planning tool that gives a surviving spouse income for life while preserving assets for children — agree to terminate the trust early and hand all assets to the surviving spouse. The trust held $117,604,143 at termination. The court ruled that the children's gift equals the present value of the beneficial interests they would have received had the trust ended on its own terms, not a lesser amount based on the father's power to redirect assets at death or a higher amount ignoring a potential gift-tax recovery obligation.

The court also rejected a valuation expert's attempt to treat the surviving spouse as five years younger than his actual age — on the theory that higher income correlates with longer life expectancy — because the expert was not an actuary and did not account for all available health information. This case is directly relevant to families using QTIP trusts in large estates: an agreed early termination can trigger unexpected gift-tax consequences for the children, and the method used to value those gifts will be scrutinized closely by the IRS.