## Facts

- Elbert Shelfer died in 1986 and, by will, divided his estate into two trusts; only the second trust was disputed.
- The second trust held two-thirds of the estate and required that “all of the net income” be paid to Elbert’s wife, Lucille, in quarterly installments during her lifetime.
- At Lucille’s death, the second trust terminated and the principal and all undistributed income passed to Elbert’s niece, Betty Ann Shelfer.
- The trust did not provide Lucille a right to, or a power to appoint, income accruing between the last quarterly distribution and her death (“stub income”); under the instrument, that stub income passed to the remainderman.
- Elbert’s estate elected QTIP treatment and claimed a marital deduction under I.R.C. § 2056(b)(7) for part of the second trust.
- After Lucille died, her estate did not include the second trust’s value in her gross estate, asserting the trust never qualified as QTIP because Lucille lacked rights over stub income.
- The IRS issued a deficiency notice asserting the trust qualified as QTIP and, under I.R.C. § 2044, its value was includible in Lucille’s gross estate.

## Issues

1. Whether a trust can qualify as QTIP under I.R.C. § 2056(b)(7) when the surviving spouse is not entitled to, and lacks a power of appointment over, stub income accruing between the last scheduled distribution and death.
2. If the trust is valid QTIP, whether I.R.C. § 2044 requires inclusion of the trust’s value in the surviving spouse’s gross estate.

## Decision

- The Eleventh Circuit reversed the Tax Court and remanded.
- The court held the trust qualified as QTIP despite the spouse’s lack of entitlement to, or power over, stub income.
- Because the trust was QTIP, the court held the trust property was includible in Lucille’s gross estate under I.R.C. § 2044.

## Legal Principles

- A trust satisfies the QTIP “qualifying income interest for life” requirement when its terms require all net income to be paid to the surviving spouse at least annually (including quarterly), and no person may appoint trust property to anyone other than the spouse during the spouse’s life.
- The statutory requirement that “all the income” be payable at least annually does not require that the spouse be entitled to income accruing after the last scheduled distribution but before death when the trust otherwise mandates periodic payment of all net income during life.
- Stub-income allocation at death is treated as an administrative timing consequence of periodic distributions, not a substantive failure of the spouse’s lifetime income interest for QTIP purposes.
- Where QTIP treatment was elected and allowed in the first spouse’s estate, I.R.C. § 2044 generally requires inclusion of the QTIP property’s value in the surviving spouse’s gross estate at death.

## Conclusion

The Eleventh Circuit held that a trust may qualify as QTIP even if the surviving spouse lacks rights to “stub income” accruing between the last periodic income payment and death, and that the elected QTIP property must be included in the surviving spouse’s gross estate under I.R.C. § 2044.


Estate of Shelfer v. Comm’r, 86 F.3d 1045 (11th Cir. 1996)