## Facts

- John D. Spencer died in March 1987, survived by his wife, Ernestine W. Spencer.
- Before his death, John executed a will and the John D. Spencer Trust Agreement.
- The will named Ernestine as executor and authorized her to decide, on the federal estate tax return, what estate property would be treated as qualified terminable interest property (QTIP) under I.R.C. § 2056(b)(7).
- The trust agreement provided that, at John’s death, two trusts would be created:
  - Trust A for Ernestine (intended to hold the assets for which the executor made a QTIP election); and
  - Trust B for John’s children (intended to hold the remaining assets).
- Acting as executor, Ernestine allocated approximately $1.2 million in assets to Trust A.
- Ernestine filed Form 706, made the QTIP election for the Trust A assets, and claimed a marital deduction for those assets under § 2056(b)(7).
- The IRS disallowed the marital deduction and assessed an estate tax deficiency of $416,447.62, reasoning that Ernestine’s authority to determine the amount of property subject to the QTIP election effectively allowed an impermissible appointment of property away from the surviving spouse.
- The Estate challenged the deficiency in the United States Tax Court, which upheld the IRS’s determination.
- The Estate (through Ernestine as executor) appealed to the United States Court of Appeals for the Sixth Circuit.

## Issues

1. Whether property can qualify for the QTIP marital deduction under I.R.C. § 2056(b)(7) when the governing instruments allow the executor, after death, to choose which assets (and how much) will be elected as QTIP and thereby fund the spouse’s trust.
2. Whether an executor’s authority to determine the size of the QTIP-elected share is treated as a prohibited power to appoint the property to someone other than the surviving spouse during the spouse’s lifetime.

## Decision

- The Sixth Circuit reversed the Tax Court.
- The court held that the assets Ernestine elected as QTIP and allocated to Trust A qualified for the marital deduction under I.R.C. § 2056(b)(7).
- The court rejected the IRS’s view that the executor’s ability to choose the amount of property to elect as QTIP is, by itself, a disqualifying power of appointment.
- The court concluded that, once the election was made for specified assets, those assets were subject to the QTIP regime and the statutory conditions for the deduction were satisfied.

## Legal Principles

- A QTIP election under I.R.C. § 2056(b)(7) permits an executor to determine, on the estate tax return, what property will receive QTIP treatment; the statute does not require the will or trust to identify the QTIP assets with finality at the moment of death.
- The “no power to appoint” limitation in § 2056(b)(7) addresses whether, with respect to the property for which QTIP treatment is claimed, any person has power to transfer that property (during the surviving spouse’s life) to someone other than the surviving spouse.
- An executor’s authority to decide how much property will be subjected to a QTIP election is distinct from a power to redirect property away from the surviving spouse once that property has been placed in the QTIP trust and elected.
- If the elected property placed in the marital trust gives the surviving spouse the required income interest for life (and otherwise satisfies § 2056(b)(7)), the estate may claim the marital deduction for that elected property.

## Conclusion

Estate of Spencer held that a “wait-and-see” plan allowing the executor (even when the executor is the surviving spouse) to select after death which assets will be treated as QTIP does not, on that basis alone, defeat the § 2056(b)(7) marital deduction; the controlling question is whether the assets actually elected as QTIP and placed in the spouse’s trust satisfy the QTIP requirements, which the Sixth Circuit found they did, so it reversed the Tax Court and allowed the deduction.


Estate of Spencer v. Commissioner, 43 F.3d 226 (1995)