The Court of Special Appeals determined that the State of Maryland cannot tax the value of a marital trust established under a will by a predeceased spouse, who was not a resident of Maryland and not, at the time of his death, subject to the Maryland estate tax. Comptroller v. Taylor, ___ Md.App. ____, 2018 WL3572629 (7/25/18).
The facts of the case are straightforward. Mr. Taylor died a resident of Michigan on December 1, 1989. On Mr. Taylor’s federal estate tax return (form 706) a federal QTIP election was taken for the residuary marital trust which was then valued at almost $2.3 million. The income from this trust was paid to Mrs. Taylor at least annually for the rest of her life. Mrs. Taylor relocated from Michigan to Maryland four years after her husband’s death. She died in Maryland on January 15, 2013.
At the time of Mrs. Taylor’s death, the value of the marital trust exceeded $4 million. If the marital trust was excluded from Mrs. Taylor’s Maryland estate, only a small amount of Maryland estate tax would be due. The Comptroller, upon its review of Mrs. Taylor’s Maryland estate tax return, assessed a deficiency and determined that the marital trust, which was subject to the federal QTIP, was includable in Mrs. Taylor’s estate for Maryland estate tax purposes. Mrs. Taylor’s Maryland estate tax liability increased by over $400,000.
The point of a QTIP trust is to qualify property placed into trust for the marital deduction. If a federal QTIP election is taken on a form 706, the trust qualifies for the marital deduction and is later included in the spouse’s taxable estate for federal tax purposes when the surviving spouse dies.
Although the QTIP trust mimics an outright transfer to the surviving spouse, the QTIP trust is not treated exactly as if the QTIP assets were transferred to such spouse. For discount planning purposes, for example, the number of shares in a closely held company in the QTIP is not aggregated with the number of shares outright held by the surviving spouse. Thus each block of stock is appraised separately for calculating value so that 50% held by a QTIP trust and 50% held outright each qualify for minority interest discounts. Est. Mellinger, 112 T.C. 26 (1999) (the Frederick’s of Hollywood, Inc. stock value case).
In Taylor, the Court of Special Appeals held that the assets from Mr. Taylor’s estate going into the QTIP trust was a completed transfer at his death upon the creation of the QTIP trust. There was no deemed transfer upon Mrs. Taylor’s subsequent death to the remaindermen for Maryland estate tax purposes. The Taylor court held that the obligatory lifetime income stream going to the widow did not pull the trust principal into the Maryland estate for tax purposes.