Today we learn from a supplemental opinion to Turner v. Commissioner, TC Memo 2011-209 Aug 30, 2011 (Estate of Turner I), that a marital deduction is not available when § 2036 is deemed to pull assets back into the estate, but the assets aren’t actually there to give to the surviving spouse.
Estate of Turner I was a standard “bad facts” family limited partnership (FLP) case, in which cash and stock were contributed to a family limited partnership. The decedent then made gifts of FLP interests to his children. The Tax Court found that under Estate of Bongard v. Commissioner, 124 TC 95 (2005), there was no significant non-tax reason to form the entity, and that the decedent retained too much control under § 2036 of the Code. Therefore all of the partnership assets, including those that were transferred away by gifts to his children, were included in his gross estate – causing significant estate taxes to be owed.
“Aha!” says the estate. If the assets were included in his gross estate, then because his estate planning documents had a pecuniary marital bequest, they are distributed to his wife and therefore qualify for the marital deduction under § 2056.
Not so, says the Court.
Under § 2036, even though the decedent had in fact transferred the assets away, they were deemed to be in his estate. However the marital deduction only applies to assets “which passes or has passed from the decedent to his surviving spouse.” Because no such passing took place, no marital deduction was available.