## Facts

- T. Buford Nicholson, a Texas rancher and investor, created a testamentary trust to provide income for his wife, Dorothy Nell Nicholson, if he died first.
- The trust directed trustees to pay Dorothy “so much of the net income” as she might “require” from time to time to maintain her usual and customary standard of living, with discretionary authority to invade corpus if necessary.
- Nicholson died in 1983, and the estate claimed a marital deduction by treating the trust as qualified terminable interest property (QTIP) under I.R.C. § 2056(b)(7).
- In 1984, after Nicholson’s death, the trustees obtained a state-court order modifying the trust to require payment of trust income to Dorothy at least quarterly.
- The Commissioner issued a notice of deficiency disallowing the claimed marital deduction and determining an estate tax deficiency of $353,537.26.
- The estate petitioned the Tax Court, arguing the trust qualified as QTIP (or that the post-death modification and evidence of Nicholson’s intent established QTIP compliance).

## Issues

1. Whether the trust, as it existed at Nicholson’s death, gave the surviving spouse a “qualifying income interest for life” by entitling her to all trust income payable at least annually under I.R.C. § 2056(b)(7).
2. Whether a post-death state-court modification requiring periodic income payments can retroactively satisfy § 2056(b)(7)’s “all income” requirement for federal estate tax purposes.
3. Whether extrinsic evidence of the decedent’s intent can overcome trust language conditioning distributions on the spouse’s “requirements” to maintain her standard of living.

## Decision

- The Tax Court held for the Commissioner and sustained the deficiency.
- The trust did not qualify as QTIP because the spouse was not entitled to all trust income at the time of death.
- The post-death state-court modification did not retroactively create a qualifying income interest for life under § 2056(b)(7).
- Extrinsic evidence of intent did not alter the operative effect of the trust’s limiting distribution language.

## Legal Principles

- QTIP treatment under I.R.C. § 2056(b)(7) requires that the surviving spouse be entitled to all income from the property, payable at least annually, for life.
- Whether the spouse is “entitled to all the income” is determined as of the decedent’s date of death, based on the governing instrument and applicable local law.
- A trust provision allowing distributions of only such income as the spouse “requires” to maintain a standard of living is a needs-based limitation that can permit retention or accumulation of excess income, defeating the “all income” entitlement.
- Post-death judicial modifications aimed at securing QTIP treatment generally cannot change the federal estate tax characterization of property interests that did not meet § 2056(b)(7) requirements at death.
- Extrinsic evidence of testamentary intent does not permit rewriting unambiguous trust language to create an unconditional right to all income.

## Conclusion

Because the trust conditioned distributions on what the spouse “required” to maintain her customary standard of living, she lacked an unconditional right to all income at the decedent’s death, so the property was not QTIP and the marital deduction was properly disallowed notwithstanding a later state-court modification.


Estate of Nicholson v. Commissioner, 94 T.C. 666 (1990)