Family Wins Large Estate and Gift Tax Battle With IRS

Posted on Nov 22, 2013

According to a new report, a family was recently able to win its battle with the IRS over estate and gift taxes. This should come as interesting news to any families engaging in California estate planning who are seeking to minimize their tax burden. The woman whose estate was involved is Jean Steinberg. Ms. Steinberg had four daughters. She gave each daughter a gift of cash and securities worth $72 million. In order to reduce the value of the gift and the corresponding gift taxes, Ms. Steinberg developed a strategy centering on the three-year rule for gifts made before death. Under this rule, gifts made within three years are calculated as part of the estate of the gift giver. 

How did this strategy play out? The following are key highlights:

  • Steinberg had her daughters agree to assume any gift or estate taxes that would result if she passed away during the three-year window.
  • Steinberg then instructed her daughters that they should reduce the value of their gifts by the amount that would revert back to her estate if she died during the three-year period.
  • If the daughters did not agree to cover the estate taxes that resulted, they were then made ineligible for receiving any additional distributions from her estate.

Ms. Steinberg’s estate argued in its dispute with the IRS that the gift was contingent upon the payment of those estate taxes, and therefore should be reduced by that value. In contrast, the IRS asserted that the strategy that was used did not affect the value of Ms. Steinberg’s estate. They held that her estate had understated the gift tax by $1.8 million. 

Ms. Steinberg thereafter pursued the matter in tax court. In an October 2013 ruling, the tax court held in her favor. The court ruled that the increased tax burden borne by Ms. Steinberg’s daughters resulted in a reduced value of the net gift that they were given. Instead, using actuarial tables for Ms. Steinberg’s life expectancy in order to predict how likely it would be for the three-year rule to take effect, they calculated a real-world value for the gifts that the court agreed with.

To learn more about California estate planning matters, contact an Anaheim trust administration attorney today at (714) 459-5481.

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James F. Roberts
Founder and owner of the Law Office of James F. Roberts and Associates, a premiere estate planning law firm