This past March, Tax Court Wins

The value of the QTIP trust in the estate of Pearl Kalikow was not reduced for undistributed income. 

Let’s look at the estate

Sidney Kalikow, a real estate developer, died in 1990 with a last will and a QTIP trust for his wife, Pearl.  The QTIP trust (Qualified Terminable Interest Property) included a requirement to pay the surviving wife all the income.  In a traditional QTIP trust, when one spouse dies, the surviving spouse has limited access to the trust assets and receives only income from the QTIP trust for the rest of their life. When the wife dies, the trust is distributed to other beneficiaries, such as children or grandchildren.

Some benefits to a QTIP trust are that the surviving spouse cannot alter the estate plan, it can protect the trust assets from being scammed by predators, it limits the second spouse’s control over the assets, and it can provide federal estate tax benefits for large estates valued over the combined federal gift and estate tax exemption.

The Sidney Kalikow (SK Trust) assets were interests in a family limited partnership that owned rental real estate, apartment buildings in New York City, and some $835,000 in cash and marketable securities. Two trusts had benefitted Kalikow’s children, a son, and a daughter, upon the death of Pearl in 2006.  The executors of the estate were different people.

So, What Happened?

Litigation immediately ensued in New York’s surrogate court over whether all the income from the SK Trust had been properly distributed to Pearl during her lifetime. The executors claimed that Pearl’s receipt of trust income was diminished in an amount of $16,946,827.   When Pearl died, she left the balance of her estate to charity and not to her children. The litigation was eventually settled with the agreement that the SK Trust would pay the estate $9.2 million. Of that amount, $6.5 was designated for undistributed income, and the balance was established for fees and commissions. The court awarded the son and the daughter letters of administration to supplement and defend any judicial tax proceeding related to Pearl’s estate tax return to the SK Trust. In addition, competing accountings were submitted by the co-trustee and the son. The co-trustee for the QTIP trust and the executor of Pearl’s estate was a friend and an accountant who received substantial payments for his services.   

Enter the IRS

To avoid becoming overly complicated in this litigation case which lasted over ten years in court and incurred huge legal fees and damage to the family, the IRS entered, determining that the value of the SK Trust assets in Pearl’s estate was not reduced by the settlement payment representing the undistributed income under Code Sec. 2044.  Ultimately, the QTIP value was settled at $ 55 million, with legal fees to the estate on both sides adding to $5 million to acquire $6.5 million in income. 

We are confident that the original intent of the QTiP Trust written by Sydney for his family did not include this scenario.  

Estate of Pearl B. Kalikow v. Internal Revenue Service

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