The interplay of related tax statutes does not always produce logical results. Consider the following facts:
Husband died a resident of New York in 2010 when there was no federal estate tax. His will created a qualified terminable interest property (QTIP) trust for the benefit of his surviving spouse. Wife died a resident of New York in 2014. At the time of her death, the value of her individual assets exceeded the New York estate tax threshold then in effect.
Under federal law, the assets in the 2010 QTIP trust were not subject to federal estate tax upon Wife’s death. But what about in New York, where there was no state estate tax repeal in 2010? Logically, shouldn’t the postponed New York estate tax on the 2010 QTIP trust assets finally come due after Wife’s death in 2014?
In a case of first impression, Estate of Seiden (N.Y.L.J., Nov. 23, 2018), the New York County Surrogate’s Court said No. How did Surrogate Rita Mella reach that conclusion based on the tax laws then (and now) in effect? The authors, who presented the case to the court, will take you through the analysis.
Husband’s estate claimed a marital deduction for New York purposes for a portion of the QTIP trust by attaching a pro forma federal estate tax return to the New York estate tax return and making the QTIP election on the pro forma federal return. After Wife died in 2014, her executor filed both a federal and a New York estate tax return and paid the New York estate tax due on her assets excluding the value of the QTIP trust assets.
The New York State Department of Taxation and Finance (the Tax Department) issued a notice of deficiency, asserting that the assets of the QTIP trust should have been included in Wife’s New York gross estate even if they were not subject to federal estate tax. The executor paid the deficiency and thereafter brought a motion to vacate the deficiency pursuant to New York Tax Law §998.
Determination of New York Gross Estate
A resident’s New York gross estate is determined by New York Tax Law §954, which provides that a resident’s New York gross estate is her federal gross estate as defined in the Internal Revenue Code (whether or not a federal estate tax return is required to be filed), subject to three exceptions, none of which applied here. Further, §954 refers to Internal Revenue Code §2044 which provides, in relevant part, that the value of the gross estate shall include the value of any property for which a “deduction was allowed” under §2056(b)(7), which deals with the deductibility of QTIP trust assets on the death of the first spouse.
Here the QTIP trust assets were not includable in Wife’s federal gross estate because no deduction was claimed or allowed after Husband died in 2010, when there was no federal estate tax. Therefore, the executor argued that the QTIP trust assets should not be includable in Wife’s New York gross estate as well.
Tax Department’s Response
The Tax Department cited its Technical Services Bureau Memorandum TSB-10(1)M dated March 16, 2010 (the TSB Memorandum) in its favor. Foreseeing this very issue, the authors of the TSB Memorandum wrote, even if no federal estate tax return was filed when the first spouse died, the value of any “QTIP property must be included in the estate of the surviving spouse.”
The problem is that is not what the statutes say. As Surrogate Mella stated in her decision, the “Tax Department cannot use a TSB Memorandum to override statutory provisions.” With respect to the Tax Department’s argument that an adverse decision would “open the floodgates” to tax avoidance, the Surrogate noted that “the legislature could still amend the Tax Law to apply to future estates.”
Finally, there is no guarantee that QTIP trust assets will be subject to New York estate tax when the surviving spouse dies. As the Surrogate rightly observed, the “trust property might decrease in value; it might be distributed and spent down; or the surviving spouse might change domicile to another state.”
Are the Floodgates Now Open?
Clearly, the decision is good news for New York residents who are beneficiaries of 2010 QTIP trusts. (The Tax Department did not appeal, and the executor received a refund check, with interest.) But might other taxpayers benefit as well?
Possibly. The same arguments could be made following the death of a beneficiary of a QTIP trust in the far more common situation where, due to the spread between the federal and New York estate tax exemptions, only a New York return must be filed after the first spouse dies. (A federal return filed solely to elect portability of the deceased spouse’s unused exclusion amount presents another twist in any application of the relevant statutes.)
Again, the Tax Department anticipated these arguments in the same TSB Memorandum that dealt with 2010 QTIP trusts. “If no federal return is required, the [QTIP] election must be made on the pro forma federal estate tax return attached to the New York State return … [and] the value of the QTIP property for which the election is made must be included in the estate of the surviving spouse.”
In Seiden, however, the Surrogate held that the TSB Memorandum “is merely a statement of the Tax Department’s position and has no legal effect.” Would a court reach a different conclusion if the impact of its decision extended beyond the limited world of 2010 QTIP trusts? Unless and until the New York State Legislature addresses the issue, the answer is not clear.
Robert W. Benjamin and Helen C. Heintz, partners at Wiggin and Dana, represented the Estate of Seiden in the New York County Surrogate’s Court proceeding. The authors acknowledge the contributions of the estate’s prior counsel, Wilk Auslander, in framing the issues.