As the calendar turns to Spring, the Yankees evil empire will try to best its own record of World Series wins. Whether they win or not, the heirs of their deceased owner, George Steinbrenner may have won a substantial victory in the form of significant estate tax savings thanks to a recent court case.
Steinbrenner passed away on July 13, 2010, leaving behind a significant estate (valued at $1.1 billion). The year 2010 is known as the year without a federal estate tax because of a temporary one-year repeal before returning in 2011. New York’s estate tax remained in effect for 2010.
Although 2010 has long since passed, an October 2018 decision from the New York County Surrogate’s Court (which has not been appealed) demonstrated the consequences of that one-year federal estate tax reprieve on New York’s estate tax.
In the Estate of Seiden, the decedent passed away in 2010. At the time, the estate set up what is known as a QTIP (or Qualified Terminable Interest Property) trust. Generally, estate tax rules provide that assets passing from one spouse to another are free from taxation. However, in certain instances, a decedent may wish to leave assets in a trust for the benefit of the spouse, but also direct who gets what is left in the trust after the surviving spouse’s death.
A QTIP trust allows an executor to make an express election on a tax return to have assets placed into certain trusts for the benefit of the spouse. As a tradeoff, the trust principal is taxed in the estate of the second spouse to die. In other words, the estate can take advantage of the marital deduction and avoid taxes when the property passes to the surviving spouse. However, that property must be included in the surviving spouse’s estate so that it will be taxed when that spouse dies.
In the Seidencase, when the decedent died no federal estate tax return was filed because of the federal estate tax repeal. A New York estate tax return was filed, and on that return, the estate took a QTIP election. The surviving wife passed away in November 2014.
Her estate did not include the QTIP property on either the federal or state estate tax return. The IRS accepted the return as filed and issued a closing letter. However, New York challenged the return and issued a tax assessment in excess of $400,000.
The Court ruled against New York, holding that the estate correctly excluded the trust property. It ruled that the first to die spouse’s New York QTIP election was irrelevant, because New York tax law provides that the New York gross estate equals the federal gross estate. Since the first to die spouse did not file a federal estate tax return in 2010, it was never required to make a federal QTIP election. As a result, it was not required to be included in the surviving spouse’s federal gross estate, and was also therefore excluded from the survivor’s state gross estate. Accordingly, the estate avoided taxes on the property placed by the first to die spouse into a QTIP type trust, both in 2010 and in 2014 when the surviving spouse died – a windfall for the heirs.
The Court noted that the state legislature has known about this issue for years and could have changed the law but has not done so. The Court, therefore, lacked the power to do so on its own
Based on the court’s decision, anyone with a spouse who died in 2010 with a QTIP trust provision can (and will) argue that the trust property entirely escapes estate tax at death of the second spouse. That includes the estate of George Steinbrenner when his widow passes.
There may also be broader implications of this decision. As the federal estate tax exemption is higher than New York’s exemption, there are cases where an estate is not subject to federal estate tax but is subject to New York estate tax. Whether the Seidenrationale can be applied to these cases to allow more QTIP trusts to avoid taxes remains to be seen. However, this case demonstrates why it is important to consult an experienced estate administration attorney to help ensure the estate doesn’t pay unnecessary taxes.
If you are an executor or heir to an estate, contact us for assistance.