Jan 1, 2006 12:00 PM, Rorie M. Sherman Editor in Chief

By: Rorie M. Sherman Editor in Chief

From David Handler in the Chicago office of Kirkland & Ellis, we have this report:

• Bequest intended to qualify for marital deduction. In Estate of Sowder v. United States, 2005-2 USTC 60,512 (Nov. 10, 2005), the District Court for the Eastern District of Washington held that a decedent's bequest to his surviving spouse qualified for the federal estate tax marital deduction under Internal Revenue Code Section 2056, because the totality of the circumstances existing when the decedent drafted his will evidenced his intent that the gift should qualify for the deduction. The decedent prepared his own will, leaving $200,000 to each of his three children and the residue of his estate to his wife, if she survived him. The will provided that if his wife did not survive him or if she died before the assets were distributed to her, the residue was to pass to the decedent's issue.

  The IRS denied the estate's claimed marital deduction, asserting that the wife received a nondeductible “terminable interest,” because her interest would fail if she did not survive until the assets were actually distributed to her.

  The court construed the will in accordance with Washington state law and found that, considering the totality of the circumstances, the decedent intended the bequest to his wife to qualify for the marital deduction, as evidenced by: (1) a copy of an article discussing the 1981 change in the law that created the unlimited marital deduction was found in the decedent's papers; (2) evidence showing the decedent was knowledgeable about the concept of deferring taxes until the second spouse's death; (3) specific bequests to the decedent's children were equivalent to the amount that could pass tax free to a non-spouse beneficiary; and (4) second-to-die life insurance was purchased in 1991, insuring the decedent and his wife. The will was construed to eliminate the requirement that the wife survive until the estate assets were distributed to her, allowing her bequest to qualify for the marital deduction.

• Estate Tax Statistics. The number of estates subject to the estate tax fell 8.2 percent in 2004, from 32,991 in 2003 to 30,276 in 2004, according to recent IRS data. About 21,152 of those taxable returns were in the $1 million to $2.5 million range; 808 involved estates worth more than $10 million but less than $20 million; and 520 involved estates worth more than $20 million. The data is available at www.irs.gov/taxstats/index.html.

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