Son and Daughter Each Give $35.1 Million to Father

Published July 24, 2026

In McDougall v. Commissioner, 163 T.C. 112 (2024), the Tax Court determined that the termination of a QTIP trust and the transfer of assets from two children to their father created taxable gifts.

Clotilde McDougall passed away in 2011. The majority of her estate was real estate inherited from her father. In her estate plan, she created a qualified terminable interest property (QTIP) trust. The QTIP trust paid all income to surviving spouse Bruce. The remainder of the trust was to be distributed to her children, Linda M. Lewis and Peter F. McDougall. The value distributed upon termination of the QTIP trust was to be equal to the value of the beneficiary's interest.

Surviving spouse Bruce had a limited power of appointment that could be used to transfer assets to other parties. In 2016, Linda and Peter transferred the entire principal of the QTIP trust to Bruce.

The IRS audited the Form 709 Gift Tax Return and claimed the transfers by Linda and Peter were taxable gifts. In the first case, the court determined that there were taxable gifts. The court determined that Bruce had not made a taxable gift, but because he ended up with trust assets with a value of approximately $117 million, there were taxable gifts. The question to be resolved in a second case would be the valuation of the gifts.

If Bruce did not exercise the limited power of appointment, the Residuary Trust was divided into equal shares for the two children. Section 12.8 of Clotilde’s will stated that if a trust were terminated, the assets would be distributed in an amount "equal to the value of their respective interest in the trust at the time of distribution."

Peter and Linda resided in the State of Washington when they entered into the 2016 agreement to commute the trust and "the entire remaining balance of the Trust shall be distributed outright and free of trust to Bruce."

Taxpayer expert David Eckstein completed several analyses. Mr. Eckstein also determined that Bruce, age 85, was a healthy male with substantial income and therefore the actuarial analysis would be based on a male of age 80. Mr. Eckstein is not an actuary. Based on his analysis, he used different discount rates for valuing the interest of Bruce and the remainder interests. He concluded the remainder interests were $53.21 million each. This was reduced to $37.48 million due to lack of marketability and lack of control discounts, but there was an allocation of remainder interests that restored the value to $51.3 million. Because there was a transfer tax of 40%, he divided this by 1.4 and assessed each interest at $36.6 million.

Alternative scenarios valued the remainder interests at $34.9 million or $37.4 million. However, because the limited power of appointment held by Bruce enabled the transfer of assets to other parties, the remainder interest was then further discounted to $156,000.

IRS expert David Fuller determined the valuation of the remainder interests to be approximately $49.2 million. Alternatively, because of reduced future distributions, the remainder value should be $51.8 million.

The Tax Court noted that a QTIP trust under Section 2056(b)(7) qualifies for a marital deduction. If a QTIP trust makes transfers that are subject to gift or estate tax, Section 2207A allows the burden of those taxes to be borne by the recipients. If there were a gift with a tax under Section 2519, that reduces the amount of the gift.

Many transfers that are covered by federal law are subject to the mortality tables and applicable federal rate under Section 7520. However, these tables are generally not used for a remainder interest that is deemed a "restricted beneficial interest."

The prior decision determined that "Linda and Peter engaged in quintessential gratuitous transfers and are therefore subject to gift tax under sections 2501 and 2511." The remaining questions are whether the value should be reduced by the limited power of appointment, whether the gift value should be reduced by tax payable under Section 2207A and whether the valuation methods must follow Section 7520. Finally, the court evaluated if Bruce’s interest should be determined not on his actual age of 85, but on an assumed age of 80.

Section 12.8 of Clotilde's will would potentially govern the distribution. The Tax Court rejected the claim that a hypothetical purchaser of remainder interests would have discounted the value because of the limited power of appointment. Since the limited power of appointment was not used, it was deemed not relevant to the calculation. Therefore, the value of the interests would be determined on termination by Section 12.8 of Clotilde's will. A Washington state court would have validated this provision of the will and protected the interests of the children.

The second issue was gift tax under Section 2207A. If the remainder had been transferred to the children, they would have been subject to a transfer tax. Therefore, the net amount of the gift must be reduced by the claimed gift tax. The IRS argued that the claim was "too speculative to impact the valuation of Linda's and Peter’s remainder interests," but the court determined this tax was a valid obligation. Because the children gave Bruce their interests, the value must be reduced by the 40% gift tax.

Section 7520 tables generally apply for federal purposes. However, the value of an interest in a trust is determined under Washington law. Because the value in the trust is determined under Washington law, the methods used for valuation will not be under Section 7520 but will be based on present value principles.

Finally, the question of valuation of Bruce's life interest is impacted by the decision to assume age 80, rather than his actual age of 85. The Tax Court noted there was no review of the medical records of Bruce. Life expectancy is certainly longer with greater income, but may also be impacted by health, mobility issues and other factors. Therefore, the decision by Mr. Eckstein to use age 80 was rejected as not being supported by the evidence.

Based on all factors, Linda and Peter each made a taxable gift of $35.1 million to Bruce.

Editor’s Note: There was no explanation in this case why the children gave their interests to their father.  This is an unusual planning strategy since assets are typically moved to the younger generation.

$1.5 Billion Deposited in Child Retirement Accounts

The Department of Treasury reports there have been 7 million children enrolled in the new child retirement accounts referred to as "Trump Accounts.” An estimated 1.7 million of those accounts are for children born between 2025 and 2028 who qualify for a grant of $1,000 from the federal government. Since the child accounts were launched on July 4, over $1.5 billion has been deposited in the accounts. Parents and certain other individuals and entities may also make contributions of up to $5,000 per year to the account. Trump accounts are available to any child under age 18 who has a Social Security number.

The $1,000 contribution by the federal government is similar to an income-tax refund. The Treasury Department states that it is taking a few days for the $1,000 amount to be deposited in the account of each qualified child.

The Trump account may be created by individuals who have an IRS online account. If you do not have an IRS online account, you must create an account with ID.me. This is a method the federal government uses to verify identity.

The ID.me account requires a video verification with a representative of ID.me. After the verification, your ID.me account is established and you can activate the child retirement account.

Both the New York Stock Exchange (NYSE) and NASDAQ officially launched the accounts on July 6. NYSE Chair Jeffrey Sprecher stated that "capitalism and the ability to participate in this country is the best thing that we can give to the next generation."

The federal government also announced on July 2 that it is open to "large philanthropic contributions of readily tradable public company stock to support Trump Accounts." While the accounts allow funding by qualified exempt nonprofits, there are also individual donors who are providing generous amounts to children. Some of the donors are funding additional contributions for children in specific states. The Treasury Department stated that contributions are expected to be large amounts of readily tradable stock from eligible contributors.

The website for the accounts also includes basic information on investing. It has tutorials that explain to children and parents the benefits of investing.

Editor’s Note: The tutorials are helpful to both school-age children and their parents. Children born from 2025 to 2028 who receive the $1,000 from the federal government are likely too young to benefit today. However, it is anticipated that the combination of these accounts and educational tutorials will enhance the financial literacy of America's children.

Debate Over Nonprofit Donor Reporting

On July 22, the House Ways and Means Committee approved the “Foreign Funding Transparency Act” (H.R. 9772), and the "Stopping Foreign Influence in Elections Act of 2026" (H.R. 9771). The bills have been submitted to the House of Representatives.

The two bills are designed to require nonprofits to highlight "contributions from foreign nationals from countries of concern, like China, North Korea, Russia, and Iran." Members of the committee suggested the reporting burden on nonprofits would be significant and that information could be "weaponized" against nonprofits and donors. Members also indicated that this reporting requirement might reduce donations to nonprofits.

The National Taxpayers Union Foundation (NTUF) submitted comments regarding the two bills to the House Ways and Means Committee.

NTUF notes the First Amendment applies and creates exacting scrutiny for disclosure of membership or donor lists. Exacting scrutiny "requires that there be a substantial relation between the disclosure requirement and a sufficiently important governmental interest" and that “the disclosure requirement be narrowly tailored to the interest it promotes.”

NTUF points out there was a major disclosure of tax information in 2019 by an IRS contractor. NTUF expressed concern that the IRS is still not able to secure data and prevent disclosure of donor names and amounts. If donor names and amounts were disclosed, it might have a chilling effect on some charitable gifts.

In addition, NTUF suggests the IRS should not be charged to discover foreign influence on elections. This is the job, not of the IRS, but rather of the Federal Election Commission (FEC).

If passed, the Foreign Funding Transparency Act would require nonprofits to collect information on donors outside the United States. The donors are permitted to state their nationality. However, if the nonprofit "knows or should have known" that the nationality statement was false, it still is subject to the requirement to collect information.

NTUF recognizes there are Americans living all over the world fulfilling jobs in the interests of the United States. The only solution is "to collect data from all donors – from Americans and foreigners alike – and then intensely investigate the source of the income." This would be impractical and a substantial burden on nonprofits.

The Stopping Foreign Influence in Elections Act of 2026 would require the nonprofit to not make gifts to "political entities" if they have received a gift from a foreign organization. Former National Taxpayer Advocate Nina Olson previously suggested that the IRS should allow the FEC to make these determinations. Olson stated, "Specifically, the FEC would have to determine that proposed activity would not or does not constitute excessive political campaign activity."

Editor's Note: These bills are currently opposed by many members of Congress. However, it is important for nonprofits to be aware that there are efforts underway to reduce foreign influence on elections. These efforts could involve requirements for greater reporting of donor information.

Applicable Federal Rate of 5.2% for August: Rev. Rul. 2026-13; 2026-32 IRB 1 (15 July 2026)

The IRS has announced the Applicable Federal Rate (AFR) for August of 2026. The AFR under Sec. 7520 for the month of August is 5.2%. The rates for July of 5.2% or June of 5.0% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2026, pooled income funds in existence less than three tax years must use a 4.0% deemed rate of return. Charitable gift receipts should state, “No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property.”