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the Probate Court was able to terminate Society National’s role
as guardian of Kimberly’s estate--a financial benefit to the
estate because, under Ohio law, the fees and expenses of a
guardianship are noticeably greater than those of a trust.
For several years, the trusts and loan worked as planned.
Clyde received interest on schedule, and duly reported it on his
income tax return each year. But then, in December 1998,
Kimberly died. She was only eleven years old, and her estate
needed no probate because her only assets were the property held
in the two trusts. Society National’s successor--the Key Trust
Company (which has its principal place of business in Ohio)--
became the administrator of her estate, and filed an estate tax
return in September 1999. The estate listed the total amounts in
both trusts--including the assets bought with the contested $1
million--under the Code provisions that regard certain trust
assets to be part of a decedent’s estate. See secs. 2036, 2037,
and 2038.6 It then claimed as a deductible debt under section
2053(a)(3) and (4) the $1 million owed to Clyde under the
promissory note. The estate also took other deductions, but
mutual concessions reduced the issues that we must decide to only
two: (1) Is the estate entitled to deduct $1 million as a
6 Unless otherwise indicated, all section references are to
the Internal Revenue Code, and the Rule references are to the Tax
Court Rules of Practice and Procedure.
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Last modified: November 10, 2007