A closer look at QTIP trusts
A qualified terminable interest property (QTIP) trust is an estate planning tool.
United States citizens are granted a credit against the gift and estate tax. When gifts and inheritances exceed the amount of this credit, a tax is imposed.
For estate tax purposes, any property which passes to a descendant’s surviving spouse is not subject to the gift or estate tax; however, generally fully ownership of this property must pass to the surviving spouse. A QTIP trust is an exception to this general rule. According to IRS code, as long as a surviving spouse has a lifetime income interest in the property, the property is treated as passing to the surviving spouse.
For example, if Grandma gives $100,000 to Grandpa, this would be a gift to a spouse — exempt from the gift and estate tax. However, if Grandma gives $100,000 to her grandson, this would be included for gift and estate tax purposes. Grandma can place the $100,000 in a QTIP trust, which will make payments to Grandpa during his life and have the money in the trust pass to the grandson when Grandpa dies. This is treated as a marital gift to Grandpa — exempt from the gift and estate tax, to the extent of any property received. However, the grandson will ultimately receive a taxable gift when the money in the trust passes to him.
Stanley Ash died on Feb. 29, 2004.
His wife, Blanche, died on Aug. 24, 2011.
The Greenville couple left a large portion of their $31 million estate to more than 50 local organizations last year (see charity info box).
Now their only child, Jennifer Ash of Connecticut, is contesting the endowment, citing a tax payment issue.
Oral arguments in the case are set to begin May 17 before Judge Charles Simon III in Montcalm County Probate Court in Stanton.
A taxing matter
Blanche Ash died with an estate worth more than $31 million — including $13.6 million in Stanley Ash’s qualified terminable interest property (QTIP) trust (see QTIP info box), according to court documents. Jennifer Ash will inherit the entire QTIP trust fund.
In Blanche Ash’s last will and testament, dated March 7, 2007, with an addition made March 4, 2010, she left $2 million to her daughter, Jennifer. She left the remainder of her estate to more than 50 local organizations, plus a few close friends.
Blanche Ash’s estate has an estimated tax liability of $4.3 million. Those taxes are due May 24 (nine months after the date of Blanche Ash’s death, per tax law).
No one is disputing the fact that the estate taxes must be paid. However, the issue of who should pay the taxes is the subject of much debate.
Attorney Robert Brower of Grand Rapids is representing I. William Arntz of Greenville and Theodore Hessler of Belding, both of whom are co-personal representatives of Blanche Ash’s estate, as well as beneficiaries. Attorney Alan Valade of Detroit is representing Jennifer Ash, along with Dale Kris, both of whom are co-trustees of Stanley Ash’s QTIP trust.
Brower is arguing that Stanley Ash’s QTIP trust should pay the estate taxes, based on a provision Stanley Ash made stating all estate taxes would be paid from his QTIP trust.
Valade is arguing the QTIP trust cannot pay the estate taxes due to a statement in Blanche Ash’s will which waived her estate’s right to obtain reimbursement of any of her estate taxes from the QTIP trust.
If the QTIP trust is not liable to pay the estate taxes, the charitable organizations will have to pay the tax. If the charitable organizations have to pay the tax, the funds are no longer charitable donations, meaning they lose their charitable tax status, meaning the tax owed will increase from $4.3 million to $6.7 million.
“Obviously this whole matter has substantial consequences for Greenville and the whole Montcalm County area,” Brower said. “Those charities that have received funds that need to be paid back will have to pay them back, so it’s a terrible consequence. Those charities that have not yet been paid will not be paid. It’s a horrible situation.”
What takes precedence?
People packed the probate courtroom for an April 19 hearing regarding a petition for direction to pay taxes. Those in attendance included Assistant Attorney General Will Bloomfield on behalf of Michigan Attorney General Bill Schutte, who is watching the “general charitable interest.”
“I can safely say we’ve never had this many people in the this courtroom ever,” said Judge Simon, according to the court transcript.
Valade expressed displeasure with the large number of local people who attended the court hearing.
“With all due respect, most of the interested parties in the courtroom today are unaffected by this conversation,” Valade told the judge according to the court transcript. “Everybody showed up for the dance. People were invited to the dance that didn’t need to be here today. They should not have been invited. And it is inappropriate, incorrect … it is unfortunate that all these people showed up, unfortunately, needlessly, prematurely.”
Valade quoted Blanche Ash’s will, which stated, “I direct that there shall be paid out of my estate subject to probate all estate, inheritance, succession, excise and other similar taxes.”
Valade said Blanche Ash’s assets were wrongfully distributed after her death as no assets were reserved to pay her estate taxes.
“The regulation could not be any clearer,” Valade said. “They have no enforceable legal rights under the very federal authority that they’re relying upon until and when they pay. They don’t want to pay.”
Brower argued that according to state and federal law, if a conflict arises in a probate case, the QTIP trust — and the statements contained therein — takes precedence.
“It’s a fairly narrow, straight question and we believe it’s a question that has not been answered by a higher court,” Brower told The Daily News. “Is it unique in terms of the fight and the amount at stake? Yes, it is a very unique case.”
Brower said he is hopeful all parties can arrive at a negotiated resolution.
“The estate taxes need to be paid,” he said. “My clients have been very candid in their discussions that we want the taxes paid and we want them paid on time.”
‘A legal tax matter’
The court must ultimately decide whether the language in Blanche Ash’s will takes precedence over the language in Stanley Ash’s QTIP trust.
Simon will hear oral arguments on May 17 before he decides whether Blanche Ash’s waiver applies to the case.
Jennifer Ash and Dale Kris have also filed a civil suit regarding a $4.6 million promissory note and a $2.3 million promissory note between the Ash estate and Greenville Tool & Die, which Stanley Ash founded. That civil lawsuit also involves the Greenville Area Community Foundation, which may have received some of the promissory note funds.
Last Thursday, Jennifer Ash made an offer to pay $2 million from the QTIP trust to the probate estate of Blanche Ash. In response, Brower said the estate taxes could be two to three times that amount. He said the dispute is full of legal and tax complexities and the interests and wishes of all individuals and charitable beneficiaries will be considered and balanced before he responds to the offer.
“This is a legal tax matter in which our objective is to determine what is just and right within the law,” Jennifer Ash told The Daily News via a statement through her attorney. “We believe that full transparency and disclosure of information by the petitioners is an important aspect of Blanche Ash’s will and trust and Dale Kris and I, as trustees of the Stanley Ash QTIP trust, have been pushing for those disclosures. Our continued wish is for a negotiated settlement on the payment of mother’s estate taxes.”