Lurie v. Commissioner

Robert Lurie had a power of appointment over trusts created by his mother. Lurie exercised that power of appointment to designate a series of other trusts (the notice trusts). Lurie and his tax planners did not believe or intend that the assets of the notice trusts would be included in Lurie’s gross estate upon his death. Three days before his death, Lurie executed a trust agreement forming two other trusts. First was a revocable trust to which Lurie’s estate would contribute all of Lurie’s nonprobate assets upon his death. Second was a marital trust, which would receive whatever assets remained in the revocable trust after probate proceedings had concluded. Lurie’s wife was the sole beneficiary of the marital trust. Lurie died, and after the probate estate had been settled, his entire claimed gross estate of approximately $91 million passed to the marital trust. Lurie’s estate (plaintiff) did not include the approximately $40 million worth of assets in the notice trusts in the gross estate. Lurie’s estate calculated its gross estate to be $91 million and claimed the marital deduction for the entire amount. The Internal Revenue Service (IRS) (defendant) determined on audit that the notice trusts were improperly excluded from Lurie’s gross estate. The IRS then determined that the estate-tax liability was no longer fully set off by the marital deduction, and it apportioned the burden of the resulting tax pro rata across all the estate’s assets. The IRS accordingly apportioned a substantial amount of the estate-tax liability to assets in the marital trust, reducing its value and, thus, reducing the amount the estate could claim a marital deduction for. The recalculation caused the estate’s estate-tax burden to increase from the $0 Lurie had intended to approximately $48 million. The estate challenged the IRS’s recalculation in tax court, which ruled in favor of the IRS. The estate appealed.