Estate of Nicholson v. Commissioner

T. Buford Nicholson died in 1983, leaving a will under which property was placed in an inter vivos trust. Under the terms of the trust documents, the trustees were to pay as much of the trust income to Dorothy Nicholson, Buford’s wife, as she required to maintain her customary standard of living. The trustees also had authority to invade the corpus if needed. In 1984, the trustees obtained an order modifying the trust, which required the trustees to pay the income of the trust to Dorothy quarterly or more frequently. The reason for that modification was that the estate (plaintiff) was trying to fit the trust into the requirements for a qualified terminable-interest property (QTIP), which would allow a spousal exemption for the property in question from the estate tax. However, those requirements mandated that in order to claim the exemption, the decedent must pass a qualifying income interest for life to the spouse, under which said spouse was entitled to all the income from the trust property, to be paid annually or more often. These criteria were to be considered as of the time of Buford’s death. The government (defendant) took the position that the trust, as it existed at the time of Buford’s death, did not fit within the QTIP exemption. The estate took the position that either the judicial reformation of the trust or extrinsic evidence concerning the trust brought it within the QTIP exemption.