## Facts

- Stanley M. Carpenter (a North Carolina resident) died in 1987 leaving a valid holographic will and codicil.
- The will made specific gifts to his daughter, Nancy Carpenter Reid, and to his widow, Ernestine Carpenter.
- The will placed substantially all of Stanley’s real estate into a testamentary trust for Ernestine’s benefit, directing that the trust “work with” her and provide money “necessary to give her a good life and happiness.”
- Ernestine could select the trust department and participate with the trustee as co-executor in decisions concerning the trust.
- The will provided that, upon Ernestine’s death, the remaining trust corpus would pass to Nancy.
- After Stanley’s death, Ernestine and Nancy disputed the meaning and effect of the trust provisions and executed a settlement giving each one-half of Stanley’s assets outright.
- The estate claimed a federal estate tax marital deduction under I.R.C. § 2056 for property transferred to Ernestine under the settlement.
- The IRS disallowed the deduction to the extent based on the settlement, asserting Ernestine’s underlying interest under the will was a non-qualifying terminable interest.
- The Tax Court sustained the deficiency; the estate appealed.

## Issues

1. Whether property transferred to the surviving spouse under a post-death settlement agreement qualifies for the I.R.C. § 2056 marital deduction when the decedent’s will originally created only a life interest with remainder to another beneficiary.
2. Whether the will’s trust provisions gave the surviving spouse a life estate coupled with a general power of appointment qualifying under I.R.C. § 2056(b)(5), or instead a non-deductible terminable interest under § 2056(b)(1).

## Decision

- The Fourth Circuit affirmed the Tax Court.
- The court held the marital deduction turns on the property interests created at death under the will and applicable state law, not on a later private settlement reallocating assets.
- The court concluded the will gave Ernestine a life interest without a qualifying general power of appointment; the remainder to Nancy was effective.
- Because Ernestine’s interest was a terminable interest, the estate was not entitled to a marital deduction for amounts paid to her under the settlement.

## Legal Principles

- State law determines the nature of the surviving spouse’s property rights at the decedent’s death; federal law determines whether those rights qualify for the marital deduction under I.R.C. § 2056.
- I.R.C. § 2056(b)(1) generally denies the marital deduction for terminable interests where another person holds a succeeding interest (e.g., a remainder).
- The § 2056(b)(5) exception requires that the spouse hold a life estate coupled with a general power of appointment over the entire interest, exercisable alone and in all events.
- A trust direction to provide for the spouse’s support or well-being, coupled with an express remainder to another beneficiary, typically does not confer a general power of appointment absent language authorizing unrestricted disposition or appointment.
- A settlement altering distributions does not, by itself, change the federal tax characterization of the interest created at death; it can affect marital-deduction treatment only to the extent it implements enforceable rights the spouse already held under state law at death.

## Conclusion

The court held that the widow’s interest under the will was a terminable life interest lacking a qualifying general power of appointment, and a post-death settlement dividing assets outright could not convert that underlying interest into property eligible for the federal estate tax marital deduction.


Estate of Carpenter v. Commissioner, 52 F.3d 1266 (4th Cir. 1995)