In a recent federal district court ruling, a decedent’s split-interest trust qualified for a charitable deduction because the income beneficiary died before the estate tax return was due.

The decedent, Evelyn Minor, left a $1.9 million estate and was survived by her brother Henry and two granddaughters. Minor’s will created a split-interest trust with Henry as the income beneficiary and eight charitable organizations as the remainder beneficiaries. Henry died only six weeks after Minor, having received $33,000 in distributions from the estate.

The granddaughters, each of whom received a bequest of $1000, contested Minor’s will. After the estate had already filed the estate tax return and paid the estate taxes without requesting a charitable deduction for the trust, the probate court accepted a settlement agreement under which the granddaughters reformed the will to remove any references to a life estate or trust in Henry’s favor. The $33,000 distributed to him was deemed to be a bequest. The granddaughters filed an amended estate tax return claiming a charitable deduction for the trust and seeking a refund of $279,000.

The IRS denied their claim based on Minor’s will, which had created the split-interest trust in violation of §2055(e)(2). According to the IRS, neither Henry’s death nor the settlement agreement validly modified the trust to qualify for a charitable deduction.

The granddaughters took the matter to the district court, which held in their favor and ordered the government to pay them $279,000. The court reasoned that since Henry died before the estate filed the estate tax return, the split-interest trust would be deemed to have been reformed as if it met the requirements of a charitable trust under §2055(e), and the estate could therefore claim a charitable deduction independent of the settlement agreement.