Estate of Riese v. Comm'r
101 T.C.M. 1269, 2011 T.C. Memo. 60, 2011 Tax Ct. Memo LEXIS 58 (2011)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
The value of property transferred to a Qualified Personal Residence Trust (QPRT) is not includable in the transferor's gross estate under Section 2036 if there was no express or implied agreement at the time of transfer that the transferor would retain possession or enjoyment of the property for life without paying fair market rent after the QPRT's termination.
Facts:
- In 1990, Sylvia Riese (decedent) inherited her home at 35 Tideway in Kings Point, New York (the residence), after her husband passed away.
- Around 1993, decedent began receiving estate planning advice from attorney Stefan F. Tucker, and investment management services from her son-in-law, Robert S. Grimes (Mr. Grimes), through his company, R.S. Grimes & Co. (RSG&C).
- In 1999, Mrs. Grimes, decedent’s daughter, discussed establishing a Qualified Personal Residence Trust (QPRT) for the residence with decedent, explaining that it would lower estate tax but would require decedent to pay gift tax and pay rent after the QPRT expired.
- On February 7, 2000, Mr. Tucker spoke with decedent by phone, reiterating that upon the QPRT's termination, she would no longer own the residence and would have to pay rent to continue living there, to which decedent agreed.
- On April 19, 2000, decedent established a 3-year Sylvia Riese QPRT (the QPRT) and transferred the residence into it, reporting the transfer on a gift tax return.
- The QPRT terminated by its terms on April 19, 2003, at which point the residence was to be distributed to two 1997 Property Trusts for the benefit of Mrs. Grimes and Ms. Zipp (decedent's daughters).
- Around the QPRT's termination date, Mrs. Grimes called Mr. Tucker to inquire about how to determine the proper amount of rent to charge decedent, and Mr. Tucker advised that fair market rent could be determined by the end of the year (December 31, 2003).
- Decedent continued to live in the residence, paying all property taxes, insurance, upkeep, and maintenance, but did not pay rent or execute a written lease with the Property Trusts during the six-month period between the QPRT's termination and her death on October 26, 2003.
Procedural Posture:
- Sylvia Riese's daughters, Ellen C. Grimes and Judith A. Zipp, were appointed coexecutors of her estate on March 10, 2004.
- On January 24, 2005, the estate filed Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, excluding the residence's value from the gross estate and claiming deductions for pre-death rent, post-death rent, and investment management fees.
- The Commissioner of Internal Revenue (Respondent) examined the estate tax return and determined a deficiency, including the value of the residence in the gross estate (alleged to be $6,138,000) and denying the claimed deductions.
- The estate filed a petition in the United States Tax Court, challenging Respondent's determination.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does the value of a personal residence transferred by Sylvia Riese to a Qualified Personal Residence Trust (QPRT) that terminated six months before her death need to be included in her gross estate under Section 2036, given that she continued to reside there without executing a lease or paying rent?
Opinions:
Majority - Vasquez, Judge
No, the value of the residence transferred to the QPRT is not included in Sylvia Riese's gross estate under Section 2036 because there was no express or implied agreement that she would retain possession or enjoyment of the property for life without paying fair market rent. Section 2036(a) requires inclusion of property in the gross estate if the decedent transferred it but retained possession or enjoyment for life or a period that did not end before death. An interest is treated as retained if, at the time of transfer, there was an express or implied understanding that the interest or right would be conferred later. The court distinguished this case from others where an implied agreement was found (e.g., Guynn v. United States, Estate of Tehan v. Commissioner) because in those cases, there was no discussion of rent or an express agreement for rent-free occupancy. Here, rent was discussed on multiple occasions (e.g., Mrs. Grimes explained the QPRT, Mr. Tucker spoke with decedent, letters were sent), and decedent agreed to pay rent after the QPRT terminated. The court found that the trustees of the Property Trusts intended to collect rent, evidenced by Mrs. Grimes' call to Mr. Tucker for advice on determining fair market rent. The delay in determining and collecting rent, and in executing a lease, was attributed to Mr. Tucker's advice to finalize it by year-end and decedent's unexpected death before that deadline. The court found as a matter of fact that there was an agreement for decedent to pay fair market rent, with determination and payments to begin by the end of 2003. This express understanding negated any implied agreement for rent-free occupancy. Therefore, the value of the residence was properly excluded from the gross estate. Regarding the deductions, the court ruled that the estate is entitled to a deduction for accrued rent ($46,298) owed for the period from the QPRT's termination to decedent's death. This was because decedent's occupation constituted a tenancy-at-will under New York law, creating a personal obligation existing at the time of her death. However, the estate was not entitled to a deduction for unpaid rent ($46,452) for the period after decedent's death as an administration expense, because the tenancy-at-will ceased upon her death and the estate had no obligation to pay rent. Lastly, the estate was not entitled to a deduction for $125,000 in investment management fees paid to RSG&C, as it failed to introduce evidence demonstrating that these services were actually and necessarily incurred in the administration of the decedent's estate.
Analysis:
This case provides important guidance on the application of Section 2036 to QPRTs, emphasizing that robust documentation and clear intent to collect rent are crucial to avoid inclusion in the gross estate. The court's willingness to accept good faith testimony about intent to determine and collect rent, even without a formal lease or actual payments, offers a degree of flexibility but underscores the risks of incomplete execution before death. For future cases, this highlights the importance for estate planners to ensure that post-QPRT termination arrangements (like lease agreements and rent payments) are finalized and implemented promptly to unequivocally demonstrate the absence of a retained interest.
