Estate taxes and gifts

people meeting

Richard Spizzirri, a successful lawyer and investor in the biotechnology sector, was married four times in his life. He was still married to wife number four, Holly, at his death in 2015, but he had been estranged from her for several years. The couple’s antenuptial agreement addressed the financial consequences of death or divorce, noting that Richard brought between $24 million and $27 million to the marriage in 1997, and Holly brought $1.25 million as well as three children from a prior marriage.

The antenuptial agreement required Richard to execute a  will making provisions for Holly and her three children, but he never did. Instead, the will he executed in 1979, long before he had met Holly, was probated. That will, which largely divided his estate among the four children from his first marriage, included four codicils added in 2014. The first three codicils made provisions for sons that Richard had fathered outside of marriage. The fourth concerned a condominium he had purchased jointly with another woman.

Holly challenged the will, hoping to enforce the terms of the antenuptial agreement. Because of the controversy, Richard’s estate asked for an extension to file the federal estate tax return, which was granted. A second extension was refused by the IRS. Eventually a settlement was reached, and the estate paid each of Holly’s children $1 million.

When the federal estate tax return was filed late, Richard’s gross estate was reported as $81 million. An estate tax of over $10 million was paid. The estate had claimed a deduction for the payments to Holly’s children as claims against the estate. The estate also did not report any taxable gifts.

Unfortunately, there were taxable gifts. In the years from 2011 through 2014, Richard had made payments to five different women, ranging from $50,000 to $90,000. He paid about $85,000 to the mother of one of his sons born outside of marriage, and $90,000 to the woman with whom he co-owned the condo. He also made smaller gifts to a daughter and stepdaughter.

Taxable gifts are taken into account in determining the final taxable estate. In addition, the IRS disallowed the deduction for the $3 million paid to the stepchildren.

In the Tax Court, the estate argued that the payments to the women were for “care and companionship services,” not taxable gifts. If so, the Court wondered, why Richard never filed any 1099s or W2s for those services. Why did he not report the payments with his tax returns? The fact that none of the women were called as witnesses by the estate suggested an inference that they might not have backed the estate’s story. The payments were held to be gifts.

The payments to the stepchildren were in the nature of bequests, not payments for adequate consideration, so the deduction was denied. A late filing penalty was added to the bill because even though the settlement with Holly had not yet been reached, the estate did have sufficient information to file a return.

© 2023 M.A. Co.