It’s eleven years and more since I first described The Phone Call; see my blogpost thus entitled 4/15/14. But the occasions for that unpleasant occurrence have not diminished. I fear that whoever prepared the 706 in Estate of Martin W. Griffin, Deceased, Christopher Griffin, Executor, T. C. Memo. 2025-47, filed 5/19/25, may have received The Phone Call, and may have had to telephone an insurer in consequence.

I’ve been there. It’s no fun, even when you win.

Briefly, the late Martin set up one (or maybe two) trusts for Maria, surviving spouse. The first trust was $2 million, Maria getting all benefits while she lived. Upon Maria’s exit, whatever’s left goes “to or for the benefit of such one or more members of a class of persons consisting of the Beneficiary’s Descendants,” as Maria directs, except none of it goes to Maria’s estate. T. C. Memo. 2025-47, at p. 3.

Upon reading the last above-written paragraph, all my ultra-sophisticated readers cried out as one “Section 2056(b)(7) QTIP!”

The following is not intended for such as they. For civilians, bequests to surviving spouse are exempt, provided whatever survivor gets is taxed in his/her lifetime or taxed in his/her estate. What surviving spouse got that survives surviving spouse’s death is terminable interest property. Anything that surviving spouse got that tries to escape taxation, either gift or estate, doesn’t. The exception is Qualified Terminable Interest Property (QTIP). That election moves QTIP into surviving spouse’s estate if so elected on first-to-die’s 706.

“The estate did not make a valid QTIP election for the $2 million bequest on Form 706. The estate admits as much by stating that it ‘failed to evidence such a QTIP election with respect to the $2,000,000 [b]equest on Part A of Schedule M of the Form 706.’ Accordingly, the $2 million bequest is not QTIP and is includible in decedent’s estate as terminable interest property.  And the estate has not identified anything on the return that shows anything resembling ‘affirmative intent’ to make a QTIP election. We do not find it necessary to address the other two requirements for QTIP because the estate’s failure to make an affirmative QTIP election disqualifies the $2 million bequest from being QTIP.” T. C. Memo. 2025-47, at pp. 6-7.

Petitioner’s trusty attorney takes a desperation goalmouth swipe at the puck as it enters the net and the red light flashes.

“The estate contends that the $2 million bequest might still be QTIP because respondent did not mention a problem with the QTIP election (or lack thereof) during the audit process.” T. C. Memo. 2025-47, at p. 7.

He gets a Taishoff “Good Try, third class.” He also gets a brushoff from Judge Nega.

“Because of this supposed shortcoming, the estate invites us to adopt a novel substantial compliance approach and analyze whether the $2 million bequest might qualify as QTIP. The estate’s argument is a nonstarter. The Court generally does not look behind a Notice of Deficiency. Full-Circle Staffing, LLC v. Commissioner, T.C. Memo. 2018-66, at *25 (“A trial before the Court in a deficiency case is a de novo proceeding; our decision is based on the merits of the record before us and not on any previously developed administrative record.”), aff’d in part, appeal dismissed in part, 832 F. App’x 854 (5th Cir. 2020). Since no QTIP election was made with respect to the $2 million bequest, that bequest is not QTIP.” T. C. Memo. 2025-47, at p. 7. For the full circle on Full-Circle, see my blogpost “Hold the Watchman Accountable,” 5/17/18.

But a $300K bequest that IRS claims is an impermissible amendment to the $2 million trust (which is supposedly irrevocable and unamendable) turns out to be a separate trust under State (KY) law. The amendment to the trust calls this a “living expense reserve,” specifically says that any leftovers go to Maria’s estate, and that’s good enough for Judge Nega.

“The question of whether the $300,000 bequest will go to Ms. Creel’s estate upon her death or pass according to the distribution provisions of the [$2 million] Trust turns on whether the $300,000 bequest created a separate trust from the [$2 million] Trust.

“On the basis of the use of the phrase ‘living expense reserve’ and the specification of distinct distribution provisions that clearly conflict with the existing provisions of the irrevocable… agreement, we find that decedent intended to create a trust with the $300,000 bequest and intended for that trust to be administered by the same person administering the [$2 million] Trust. Bolstering this conclusion is the fact that the $300,000 bequest contemplates how any remaining amount will be distributed upon Ms. Creel’s death, whereas the $2 million bequest contains no comparable provision. Further, the $2 million bequest does not use the phrase ‘living expense reserve’—indicating a distinction between these two bequests. Decedent intended for the $2 million bequest to be transferred to the [$2 million] Trust and governed by the provisions of that trust. But he intended for the $300,000 bequest to be a part of a legally distinct trust administered by the same trustee overseeing the [$2 million] Trust.” T. C. Memo. 2025-47, at pp. 9-10. (Footnote omitted, but it says the drafting of the $300K is not as indicative as a separate trust would be; understatement).

In short, trusty attorney saves part of the $1,047,398 deficiency (plus 20% chop). But whoever prepared the trust documents and the 706 has probably gotten The Phone Call, and has made their own.