Marion and Willard Derken owned and maintained two investment accounts, one separate account and one joint account with Merrill Lynch. One of the spouses, Marion, earned a vast sum of money playing the stock market and had $435,000 in the account by 1994. In contrast, her husband Willard only had about $27,000 in his account. The joint account that they owned had about $260,000. In that same year, both spouses decided to transfer the money in the joint account to Willard’s account. In April of 1997, Marion signed a promissory note to Willard in the amount of $200,000. Willard passed away shortly after this, making the promissory note receivable to his estate. Marion signed a check for the amount to her late-husband’s estate in 1998. She passed away in 2001. After she died, her estate tried to take a deduction on the debt that she owed to her late-husband’s estate. The IRS denied the deduction on the grounds that the debt that created that the deduction was made by an agreement that lacked consideration. In contrast, Marion’s daughter Lyn Bailey, the executrix of her mother’s estate, testified of her parent’s intent to equalize their estates. She testified that transfer was evidence of a formal agreement and consideration.
The court in the Estate of Marion Derksen v. United States agreed with the IRS and disallowed the deduction. The court reasoned while Lyn consistently reported that the $200,000 first as an asset and then as a debt, this only showed that Lyn believed that this was her parent’s intent. When the court considered the evidence, it noted that there was no evidence of that she “received any value, rights or privileges in return, nor is there evidence that she considered this transfer to be a loan and intended to seek repayment.” The court decided that this was not sufficient to overcome the evidence that there was no agreement, especially when the court realized that the funds were actually never transferred.
See David H. Lenok, Court Denies Estate Tax Deduction for Debt Owed to Pre-Deceased Spouse, WealthManagement.com, Dec. 10, 2012.
Special thanks to Brian Cohan (Attorney at Law, Law Offices of Brian J. Cohan, P.C.) for bringing this article to my attention.
