In Foster, the Tax Court considered the following: (1) whether an estate was entitled to discount the value of assets in three marital trusts due to the potential for litigation; and (2) whether assets in the marital trusts could be discounted for lack of control over and lack of marketability of the marital trusts’ assets. In this case, the beneficiaries of an Employee Stock Ownership Plan (“ESOP”) filed suit against the decedent’s predeceased husband and the corporate trustee, as co-Trustees of the ESOP. The beneficiaries of the ESOP alleged that the co-Trustees breached their fiduciary duty in connection with the ESOP. The beneficiaries also sought restitution against the decedent and another corporate trustee, as co-Trustees of the three marital trusts which were created at the death of the decedent’s husband, and requested the imposition of a constructive trust over the marital trusts’ assets. To limit the liability of the co-Trustees of the marital trusts, the corporate trustee froze the decedent’s right to withdraw principal from one of the marital trusts. The ESOP beneficiaries lost in district court and did not seek a stay of judgment. The decedent’s estate tax return included the value of the marital trusts after applying a discount for the hazard of litigation and a discount for the lack of control over and the lack of marketability of the assets in the marital trusts resulting from the asset freeze imposed by the corporate trustee.
The Tax Court did not allow a discount for the hazard of litigation because the ESOP beneficiaries did not seek a stay of judgment against the assets in the marital trusts. The Tax Court distinguished cases in which a discount was allowed because in such cases the rights of a purchaser of the assets could have subsequently been impaired by litigation. In this case, because a stay of judgment was not sought, the constructive trust was not imposed on the marital trusts’ assets at the time of the decedent’s death. Consequently, a willing buyer would not have insisted on a discount on the marital trusts’ assets because the ESOP lawsuit would not have affected the buyer’s rights to such assets.
The Tax Court similarly did not allow a discount for lack of control over or lack of marketability of the marital trusts’ assets because two of the three marital trusts were not subject to the asset freeze and the asset freeze on the third marital trust applied only to the decedent’s ability to withdraw principal from the trust rather than on the right to sell the assets in the trust. Accordingly, the Tax Court held that a discount was not appropriate because a hypothetical buyer would be unaffected by the asset freeze.