In this PLR, the Internal Revenue Service ("IRS") ruled that amounts paid to charities from the residue of the decedent's estate pursuant to a settlement agreement qualified for the charitable deduction for federal estate tax purposes because the charities had an enforceable right under state law to receive a portion of the residuary estate due to the undue influence by the drafting attorney (who was also a beneficiary).
The Decedent hired an attorney to prepare her will, which included the provision that the residue of the Decedent's estate was to be distributed as follows:
"If [Attorney] survives me, to [Attorney], pursuant to the following: I have expressed my wishes to [Attorney] to handle this, my inheritance. In his sole discretion, he shall disburse funds from the estate to [Charity], and to Organizations for the preservation and care of orphan animals. It is up to his sole discretion without question and without the necessity of external intervention to disburse randomly, as he sees fit, funds to the above organizations and any remainder is to be retained by him as he sees fit."
In addition, the Decedent conveyed her residence to the Attorney and herself as joint tenants with right of survivorship, and similarly tilted assets in a brokerage account.
Following the Decedent's death, the Attorney took possession of the residence and sold it, and took possession of the assets of the joint brokerage account. The Attorney distributed some funds to charity, and retained the remainder.
The State Attorney General, on behalf of the charitable beneficiaries under the will, filed objections to the will and requested that those portions of the will appointing the Attorney as executor and that provide for a bequest to the Attorney be stricken. Shortly thereafter, an individual filed a petition in the applicable county court seeking a return of the joint brokerage account and the proceeds of the sale of Decedent's home.
The Attorney, the Attorney General and the individual, in an attempt to avoid the expenses and uncertainties of continued litigation of the estate, agreed on a proposed settlement where a fixed dollar amount of the joint brokerage account and all proceeds of the sale of the residence were paid to the estate, and the residue of the Decedent's estate was divided into two parts, with one part passing to charity and the other passing to the Attorney.
The IRS cited four factors for determining if the amount passing to charity pursuant to the settlement agreement would qualify for the federal estate tax charitable deduction, as follows:
- "The settlement agreement was negotiated, and is in settlement of a bona fide will contest;
- The charities have an enforceable right to the residue of the Decedent's estate under State law, and the payments are in recognition of that right;
- The payments do not exceed what the charities would have received if they had pursued their rights in litigation; and
- The form of the payments passing to the charities under the settlement agreement resembles the form of the benefits that the charities could have received under the terms of the Decedent's will."
The IRS found that under State law, there was a strong argument that the Attorney exerted undue influence over the Decedent, and that if a court in the State agreed, it would rewrite the Decedent's will to remove provisions in favor of the Attorney, leaving the residue instead to charitable organizations. As the facts here fell within the four factors above, the IRS permitted a full deduction for the negotiated amounts passing to the charitable beneficiaries.