The motto of the old 92nd Gordon Highlanders was also the story of the late Virginia V. (“VV”) Kite, daughter of the pioneers of Oklahoma, and her estate and gift machinations, especially her deft manœuvres through the Section 7520 tables and regulations.
Read all about it in Estate of Virginia V. Kite, Donor, Deceased, Bank of Oklahoma, N.A., Executor/Trustee, 2013 T.C. Memo. 43, filed 2/7/13.
Here’s VV’s story, told by Judge Paris: “Mrs. Kite was born on April 8, 1926. Her father was the chairman of a family-owned bank, Vose Bank, and its successor, First National Bank & Trust Co. of Oklahoma City (FNB). As a member of a prominent banking family, Mrs. Kite was the beneficiary of numerous trusts, which held, among other valuable assets and cash, a portfolio of founder’s shares and other securities of FNB, its affiliates, and its regional partners.
“Business acumen was also passed on from generation to generation. Mrs. Kite was a savvy businesswoman who actively participated in managing her assets. She maintained an office where two employees assisted with her family’s finances. In addition, she would meet with her trust administrator at least quarterly to discuss the financial activities of her many trusts and their investments.
“Mrs. Kite married James B. Kite (Mr. Kite), who, according to his death certificate, was a geologist in the petroleum business. They were married until Mr. Kite’s death on February 23, 1995. The couple had three children: Carolyn K. Eason (Ms. Eason), James B. Kite, Jr. (Mr. Kite, Jr.), and Virginia K. Kite (collectively, Kite children). After Mr. Kite’s death, Mrs. Kite remained a widow until she died.” 2013 T. C. Memo. 43, at pp. 3-4. (Footnotes omitted).
VV’s estate planning team was clearly Oklahoma’s best. She and they made sure she kept her hands on the income from all the multifarious trusts, so that the QTIPs (and VV had more QTIPs than RiteAid) remained pristine and free from tax.
The jewel in the estate planning crown (aside from shuttling of assets and trustees from trust to trust to LLC and back again, in Oklahoma and Texas, with bewildering speed) was the 10-year deferred annuity her kids gave her in exchange for mucho diñero from VV’s prodigious hoard. In short, the kids sold VV an annuity. See my blogpost “The Case of the Reluctant Executor”, 12/1/11, for what happens when an annuity deal goes wrong. But VV and her team got it right.
If VV lived for fewer than 10 more years (she was then 74 years old), the cash was out of her estate and the kids were off the hook. If she lived for 10 more years, the kids had to pay VV out of their own money (they weren’t poor, but the payments were hefty); and if VV made it for 13 more years, based on the kids’ current assets, they’d be broke.
But for the game to work, VV had to be at least healthy enough to have a shot at making it 10 more years. And being VV and stuffed with business acumen, she made sure that after having given the kids the loot, she still had enough to maintain her lifestyle, which included, but was in no way limited to, her home and a demi-brigade of home health aides.
She got a doctor’s note saying that she was in reasonably good health; but Judge Paris notes the doctor doesn’t testify on the trial.
IRS claims VV is at death’s door and the annuity is a sham, but nobody testifies VV was terminally ill when she made the annuity deal. VV checks out three years and a couple of months after the annuity deal.
IRS issues mammoth deficiencies, and off to Tax Court VV’s executor goes.
Question: was the annuity a disguised gift, in that VV didn’t get reasonably equivalent consideration for the transfer of the loot to the kids?
Judge Paris: “Section 7520 provides that the value of any annuity shall be determined under tables prescribed by the Secretary. Mrs. Kite and her children used IRS actuarial tables to value the annuities, and respondent [IRS] does not argue that they used the tables improperly. Rather, respondent contends that they should not have used the actuarial tables to value a 10-year deferred annuity because Mrs. Kite’s deteriorating health in 2001 made her death within 10 years foreseeable. In addition to the high probability of Mrs. Kite’s death within 10 years, respondent argues that the lack of security for the annuity agreements, among other things, demonstrates that the parties had no real expectation of payment, and, consequently, the annuity transaction lacked substance. Respondent, as the party seeking to depart from the actuarial tables, bears the burden of proving that the circumstances justify the departure.” 2013 T. C. Memo. 43, at p. 22.
And IRS fails to shoulder the burden. VV had 12.5 years to go per the tables, and her non-testifying doctor wrote that she had better than a 50% chance of making it for another 18 months. You can’t use the tables if you’re terminally ill, but that means “…an ‘incurable illness or other deteriorating physical condition’ with at least a 50% chance of death within a year. Sec. 1.7520-3(b)(3), Income Tax Regs. In Estate of McLendon v. Commissioner, 135 F.3d 1017, a taxpayer who had terminal cancer, received 24-hour home health care, and, according to his physician, had a 10% chance of surviving for more than one year was not terminally ill for purposes of using IRS actuarial tables to value a private annuity transaction.” 2013 T. C. Memo. 43, at p. 23.
What about the battalions of home health care aides? Judge Paris: “Respondent did not challenge the physician’s letter or present evidence contradicting the physician. Instead, respondent relied on Mrs. Kite’s 24-hour medical care at home, which began in 2001, and her increased medical costs from 2001 through 2003 to conclude that her death within the next 10 years was foreseeable. Mrs. Kite’s increased medical costs, however, were due primarily to the cost of home health care. Mrs. Kite’s Federal income tax returns filed for 2001 through 2003 claimed medical expense deductions of $131,100, $142,136, and $176,982, respectively, of which $115,780, $114,587, and $170,845, respectively, were attributed to home health care. Although the increased medical costs and home health care indicate that Mrs. Kite’s health was in decline, they alone do not suggest, let alone prove, that Mrs. Kite had a terminal illness or an incurable disease. Rather, Mrs. Kite’s increased medical costs merely demonstrate that Mrs. Kite was a wealthy, 75-year-old woman who, when faced with certain health problems, decided to employ health care aids [sic] at her home. Her decision to hire home health care was not unusual for a woman who was accustomed to hiring personal assistants. Moreover, as exemplified in Estate of McLendon, increased medical costs and home health care do not prove a terminal illness or other incurable disease for purposes of section 7520. Accordingly, Mrs. Kite was not precluded from relying on IRS actuarial tables to value the annuity transaction.” 2013 T. C. Memo. 43, at pp. 23-24. (Footnote omitted).
So the annuity deal stands, and, as we saw, VV, acting true to form, departs this life three years and a few months thereafter, and the kids get the Bennys.
The Estate does owe some tax on whatever wasn’t an income interest, but that’s for the technicians and a Rule 155 beancount.
Nicely done, VV.