## Facts

- Arthur M. Clayton, Jr.’s will divided the residuary estate between two trusts: Trust A and Trust B (for the surviving spouse and intended to qualify as QTIP).
- The will provided that the portion of the residue for which a timely QTIP election was made would fund Trust B; any portion for which no election was made would pass to Trust A.
- Mary Magdalene Clayton, the surviving spouse and independent co-executrix, made a timely I.R.C. § 2056(b)(7) QTIP election for a portion of the residuary assets, increasing the estate’s marital deduction by more than $1 million.
- The remaining residuary assets passed to Trust A, over which the surviving spouse held a power of appointment.
- The IRS disallowed the marital deduction for the elected Trust B portion, arguing the election-and-formula scheme was “tantamount” to giving the surviving spouse an impermissible power to appoint QTIP property.
- The Tax Court agreed with the IRS and denied the marital deduction as to that portion; the estate appealed.

## Issues

1. Whether property passing to a surviving-spouse trust under a will that conditions funding on the executor’s timely QTIP election is disqualified from QTIP treatment because the non-elected residue passes to another trust over which the spouse holds a power of appointment.
2. Whether making a QTIP election that determines which residuary assets fund a QTIP trust is “tantamount” to conferring a prohibited power of appointment over QTIP property under I.R.C. § 2056(b)(7).

## Decision

- The Fifth Circuit reversed the Tax Court.
- The court held that the portion of the residue for which a timely QTIP election was made and that passed to Trust B qualified for the estate tax marital deduction as QTIP.
- The court rejected the IRS and Tax Court’s “tantamount to a power of appointment” theory as inconsistent with the statute.

## Legal Principles

- I.R.C. § 2056(b)(7) allows a marital deduction for QTIP if (1) the surviving spouse is entitled to all income for life, (2) no person has a power to appoint the property to anyone other than the spouse during the spouse’s life, and (3) the executor makes a QTIP election.
- A statutory QTIP election that determines the portion of the residue funding a QTIP trust is a tax election during estate administration, not a legal power to appoint QTIP trust property away from the surviving spouse during life.
- QTIP qualification turns on actual legal powers over the QTIP property during the spouse’s lifetime, not on an analogy that an election affecting allocation among residuary dispositions functions like a power of appointment.

## Conclusion

The Fifth Circuit held that a will may condition the amount or portion passing to a QTIP trust on the executor’s timely QTIP election without creating a disqualifying power of appointment, so the elected Trust B property qualified for the marital deduction under I.R.C. § 2056(b)(7).


Estate of Clayton v. Commissioner, 976 F.2d 1486 (5th Cir. 1992)