Richard Spizzari lived an affluent lifestyle as a lawyer. He married three times and had multiple children from all his marriages. He was entering his fourth marriage with Holly, who had been married with three children of her own and a net worth of $1 million. Richard had significant wealth, so they signed a prenuptial agreement before the marriage.
They were married for 18 years, and the prenuptial agreement was modified several times. The third modification pertained to what Holly would receive upon Richard’s death. The modification allowed Holly to reside in his Easthampton, N.Y. home for five years after his death. She waived her rights to a marital trust and residency rights under his Will to instead receive a $9 million bequest: $6 million to her and $1 million each to her adult children.
Richard died in May 2015, but never updated his last will to incorporate the modifications. Holly and her children filed a claim against the estate seeking their payments, which were paid. The estate tax return claimed a deduction for the payments to the children and the value of Holly’s right to live in the home.
Under IRC section 2053, a claim must be “contracted bona fide and for adequate and full consideration in money or money’s worth” to be deductible. There are also special rules related to spousal payments. The clause is designed to prevent gifts and transfers through creative consideration to decrease the value of an estate at death. Holly argued she waived her spousal support in exchange for the payments; therefore, they had provided consideration.
The Internal Revenue Service disallowed the deductions, and the estate appealed to the U.S. Tax Court and the United States Court of Appeals for the Eleventh Circuit. Both Courts determined that Holly's inheritance rights were exchanged for the 6-million-dollar bequest to her, the $3 million to her children, and the right to reside in the home. The Courts emphasized that transactions between family members are subject to extra scrutiny. They felt that the evidence did not comply with the substantiation and record-keeping requirements for the deduction and did not have the characteristics of a bona fide transaction. Moreover, her right to live in the Easthampton house did not qualify for the marital deduction either, since the pre-nuptial agreement stated she had only 5 years to reside there. Which means that Richard’s estate had to pay estate tax on the value of the Easthampton house, even though it could not sell it for 5 years. Finally, deductions for maintenance, repair, and administrative expenses related directly to Richard's home in Aspen were also disallowed.
This story has two elements: updating and completing your estate planning to ensure all components link, and it never pays to be greedy when taking deductions.
Call the attorneys at Altman & Associates at 301-468-3220 or fill out our contact form to schedule a consultation to review your estate plan to ensure this does not happen to your family upon your passing.
