The IRS held that an estate was not entitled to an estate tax charitable deduction for the amount paid to a charitable trust pursuant to a settlement agreement.
The Decedent’s Will made a number of specific bequests and created trusts for his son and other relatives which provide that the remainder interest in the trusts are distributable to a charitable trust which he created. However, the Will contained no residuary estate provision.
The Decedent’s sole heir was his son who argued that he was entitled to the Decedent’s residuary estate. The charitable trust argued that the omission of the residuary clause from the Will was a scrivener’s error and that the Decedent’s intent was to leave his residuary estate to the charitable trust. The attorney who drafted the Will confirmed this in an affidavit. After months of negotiations, the son and the charitable trust settled the dispute and executed a settlement agreement.
The issue presented in this ruling was whether the estate could take an estate tax deduction for the amount payable to the charitable trust under the settlement agreement.
The IRS determined that it has been established that the parties to a settlement agreement are only entitled to federal estate tax deductions to the extent that they have an enforceable right under properly applied state law. Therefore, the question was whether the charitable trust had an enforceable right under state law to receive the payment under the settlement agreement.
Although there is a preference under the applicable state law not to allow the passing of an estate through intestacy, when there is a valid Will, there is also a presumption that heirs of an estate are not to be disinherited unless it is through the plain language in the Will. Additionally, although a court is allowed to consider external evidence when interpreting a Will, that evidence is only allowed when the Will is ambiguous.
Since the Decedent’s Will did not conflict with the distribution of the residuary clause through intestacy, there was no reason under state law for the court to examine extrinsic evidence such as the attorney’s affidavit.
Therefore, the IRS held that the charitable trust was not entitled to the settlement proceeds under applicable state law and the estate was not entitled to the charitable deduction for the settlement amount.