Ending a QTIP Trust Early Cost Two Children a $35 Million Gift Each
How the family got here
Clotilde McDougall died in December 2011, leaving an estate built largely on her share of a family real estate business. Her will funded a Residuary Trust that paid all net income to her husband Bruce, gave the trustee discretion to invade principal for his health, maintenance and support, and left Bruce a testamentary limited power to appoint the principal among Clotilde’s descendants. If he never exercised that power, the remainder went to the children in equal shares.
Bruce, acting as personal representative, made a qualified terminable interest property election under section 2056(b)(7). That is the ordinary move. It bought the estate a full marital deduction and pushed transfer tax to Bruce’s death.
In October 2016 the family signed a Nonjudicial Agreement commuting the trust and distributing the entire balance to Bruce outright and free of trust. The stipulated value of the trust assets that day was $117,604,143. No reserve was set aside for transfer taxes, a detail that turns out to matter enormously.
The 2024 ruling that set up this one
The earlier decision, McDougall v. Commissioner, 163 T.C. 112 (2024), split the family in an uncomfortable way. Bruce escaped. Following Estate of Anenberg, the court held he made no deemed gift under section 2519 because he wound up owning the assets outright rather than disposing of a qualifying income interest.
The children did not escape. They had held valuable remainder interests, they consented to hand everything to their father, and they received nothing back. The court called that a quintessential gratuitous transfer and taxed it under sections 2501 and 2511. An April 2025 order then fixed the measure of the gifts as whatever the children would have been entitled to receive under section 12.8 of Clotilde’s will had they not agreed to give it all to Bruce.
Which left one question for this opinion. What were those hypothetical terminating distributions worth?
The gap between the two sides was almost the whole trust
The Commissioner said $53,408,746 per child. The taxpayers said $156,000 per child, or in the alternative no more than $34.9 million. That is not a valuation dispute so much as two incompatible theories of what the children owned.
The $156,000 figure came from the taxpayers’ expert assuming Bruce’s testamentary power of appointment made the children’s interests nearly worthless, since Bruce had already executed a will directing the trust principal to his own revocable trust. The court rejected that outright, and the reasoning is the most quotable part of the opinion. Had Clotilde wanted to leave everything to Bruce she could simply have done so and still claimed the marital deduction. She built a trust instead. Reading her will to let Bruce take it all would be manifestly contrary to the intent the document expresses.
Holding one: state law beats the section 7520 tables
The Commissioner argued the remainder interests had become ordinary property interests that could and must be valued using the actuarial tables under section 7520. The taxpayers argued they were restricted beneficial interests exempt from the tables under the regulations.
Judge Halpern agreed the tables did not apply, but on different and broader ground. Section 7520(a) opens with the words “For purposes of this title,” which the Commissioner’s brief left out. A trustee dividing trust assets under section 12.8 of the will would be determining substantive property rights under Washington law, not making a determination for purposes of the Code. The trustee might consult the tables for guidance. They would not control.
That is the classic division of labor between state and federal law restated in a place people forget it applies. State law defines what you own. Federal law taxes it. When the valuation question is what a state court would have made a trustee do, the federal actuarial tables are a reference, not an answer.
Holding two: the avoided reimbursement reduces the gift
This is where the taxpayers won real money. Under section 2207A(b), if the children had actually received their remainder distributions, Bruce would have made a deemed section 2519 transfer, owed gift tax, and held a statutory right to recover that tax from the children. Under the regulations a surviving spouse’s recovery right reduces the deemed gift, producing the interrelated computation familiar from any net gift.
The Commissioner called the hypothetical gift tax too speculative to count, noting that no tax was ever paid and no reserve was created. The court disagreed, and the logic is tight. The children’s gift has to be measured by comparing what happened against what would have happened. In that alternative world Bruce owes gift tax and collects it from them. So what they gave up was the distribution net of the reimbursement liability they escaped.
Mechanically the court divided the pre-reimbursement remainder values by 1.4, reflecting the 40 percent top gift tax rate. On a $49 million baseline that adjustment is worth roughly $14 million per child. Anyone modeling a trust termination should be running that division, and plenty of planners are not.
Holding three: money does not buy you a younger actuarial age
The taxpayers’ expert treated Bruce as five years younger than 85, citing a JAMA study on longevity among high earners and the fact that Bruce’s 2015 adjusted gross income of about $2.2 million put him in the top one percent. Linda testified he was in good health and mentally sharp.
The court said no. High income alone does not justify departing from standard actuarial tables. Those tables work because of the law of large numbers, and adjusting for some individual factors but not others introduces bias. The expert had not reviewed medical records, had not interviewed Bruce, was not an actuary and had not consulted one. Bruce’s life expectancy was determined from his actual age.
Practitioners should read that as a general warning about expert reports. The court was not hostile to a departure from the tables in principle. It was hostile to a cherry-picked departure supported by one variable and a magazine study.
What this means for families holding marital trusts
If a trust termination is on the table
Early termination of a QTIP is not a neutral housekeeping step. The Anenberg and McDougall pairing means the surviving spouse can walk away clean while the remainder beneficiaries make a taxable gift measured in the tens of millions. If the family’s goal is to consolidate assets with the surviving spouse, model the children’s gift tax before anyone signs, and consider whether a non-pro-rata distribution that actually delivers value to the remaindermen achieves the same practical result without the transfer.
If a termination already happened
Look at whether the section 2207A(b) reimbursement was addressed. A termination agreement that is silent on transfer taxes, like the one here, still supports the net gift reduction because the analysis runs on the hypothetical rather than the actual document. Returns filed without that adjustment may be overstating the gift substantially.
New York and multistate families
The state law holding cuts both ways depending on where the trust sits. Washington law drove the result here. A New York trust with a differently drafted termination clause could produce a different division of value on identical federal facts, which means the governing instrument and the state’s construction rules are now valuation inputs rather than background.
How The Reed Corporation works with clients on this
We work with families whose trusts were drafted a generation ago and no longer match how anyone lives. The instinct to simplify by collapsing a marital trust is usually sound and almost never free, and the cost lands on the children rather than the person asking the question.
Our role sits on the reporting and modeling side. That means running the gift tax exposure before a termination agreement is signed, coordinating with the family’s estate counsel who drafts the instrument, and preparing the gift tax returns when a transfer does occur. For clients weighing a restructuring, that work runs through tax strategy consulting, and the filings themselves through individual return preparation.
We cannot advise on the legal terms of a trust or which structure a family should adopt, and a decision like the McDougalls’ belongs with an attorney. What we can do is put a number on each option first, which is generally what changes the conversation. Most of this work reaches us through our high net worth practice.
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Frequently Asked Questions
Why did the father owe nothing while the children owed gift tax?
Because section 2519 taxes a surviving spouse who disposes of a qualifying income interest, and Bruce did not dispose of anything. He ended up owning the entire trust outright, which the court in the 2024 McDougall decision treated as consistent with Estate of Anenberg rather than as a taxable disposition. The children were in the opposite position. They held remainder interests with real value, they consented to give those interests up, and they got nothing in exchange. That is a gratuitous transfer under sections 2501 and 2511 regardless of how friendly the family arrangement was.
What is the section 2207A reduction and why does it matter so much?
If the children had taken their proper distributions, their father would have made a deemed gift and owed gift tax, and section 2207A(b) would have given him the right to collect that tax from them. Because their actual gift is measured against that alternative scenario, the value of what they gave up is reduced by the reimbursement obligation they avoided. The court implemented it by dividing the pre-reimbursement value by 1.4, reflecting the 40 percent top rate. On roughly $49 million of remainder value that adjustment removed about $14 million per child, so it is not a footnote.
Do the section 7520 actuarial tables still apply to remainder interests?
In most settings yes. What this opinion holds is narrower than it first appears. The valuation question here was what a trustee would have been required to distribute under Washington law had the trust terminated without the family’s agreement. That is a determination of substantive state law property rights, not a valuation made for purposes of the Internal Revenue Code, and section 7520 by its own terms applies for purposes of the title. A trustee could look to the tables for guidance but would not be bound by them. Where you are valuing a remainder interest for a federal transfer tax computation in the ordinary course, the tables still govern.
Can I argue a beneficiary will live longer or shorter than the tables predict?
Rarely, and not on the record presented here. The court rejected a five-year downward age adjustment supported by the beneficiary’s high income and a family member’s testimony that he seemed healthy. Standard tables work through the law of large numbers, and adjusting for one favorable factor while ignoring others introduces bias. If you intend to depart from the tables, expect to need an actuary, actual medical evidence, and a methodology that accounts for the factors cutting against your position as well as those supporting it.
We are considering ending a marital trust. What should we do first?
Model the remainder beneficiaries’ gift before anyone signs anything. The common assumption is that collapsing a trust to give the surviving spouse full control is administrative tidying, and this case shows it can be a multimillion dollar transfer by the children. Ask specifically what each remainderman would have received under the instrument’s own termination clause, because that is the measure the court used. Then look at whether a non-pro-rata distribution that actually delivers value to the remaindermen gets the family most of what it wants without a gift. Bring your estate attorney into that conversation early, since the answer turns on the document and on state law.
Does a spendthrift clause or a limited power of appointment reduce the gift?
Not the way the taxpayers hoped. Clotilde’s will contained a standard spendthrift clause and gave Bruce a testamentary limited power to appoint principal among her descendants, and the taxpayers argued the power made the children’s interests nearly worthless because Bruce had already signed a will exercising it. The court found that reading contrary to the testator’s intent, reasoning that if Clotilde had wanted Bruce to have everything she could have left it to him outright and still taken the marital deduction. A trustee applying Washington law would have assumed equal distribution to the children and ignored the unexercised power.