Essay
The Agreement That Cost Two Children $35 Million Each
What does it cost a family to agree with itself?
That sounds like a question with no answer. Everyone consented. No one sued. The lawyers papered it properly. But the U.S. Tax Court just put a number on exactly that scenario, and the number is $35,141,321 — twice over. The opinion is McDougall v. Commissioner, T.C. Memo. 2026-58, filed July 20, 2026, and if your estate plan runs through a marital trust, it deserves an hour of your attention.
What actually happened
Clotilde McDougall died in December 2011. Her will left the residue of her estate — primarily her share of a family real estate business she had inherited from her own father — to a trust. Her husband Bruce received the trust’s net income at least annually, plus discretionary principal for his “health, maintenance and support in his accustomed manner of living.” He also held a limited testamentary power to appoint the principal among Clotilde’s descendants. Her two children, Linda and Peter, held the remainder.
A QTIP election was made, so no estate tax came due at Clotilde’s death. The property would be taxed later, in Bruce’s estate. Standard, careful, unremarkable planning.
Then, in October 2016, the family decided to simplify. Bruce and both children signed a nonjudicial agreement terminating the trust and distributing every asset — stipulated at $117,604,143 — outright to Bruce. The children took nothing.
The rule: a QTIP is a set of trades, and they all have prices
The marital deduction for property left in trust is a bargain, not a gift. Under Sec. 2056(b)(7), a surviving spouse’s trust interest normally fails the deduction because it is a terminable interest — it ends at death and passes to someone else. Congress carved out the QTIP exception, but the price of the exception is that the property gets taxed somewhere. Defer at the first death, pay at the second.
That bargain assumes the trust actually runs its course. When the family collapses it early, the tax code does not simply shrug. Two provisions wake up. Sec. 2519 treats a surviving spouse’s disposition of a qualifying income interest as a transfer of everything but that income interest. And Sec. 2207A(b) gives the spouse who eats that gift tax a statutory right to recover it from the people who received the property.
In an earlier round of this same litigation, McDougall v. Commissioner, 163 T.C. 112 (2024), the court sorted out who gave what to whom. Bruce made no gift: under the QTIP rules he was already treated as owning the property, so ending up with it outright transferred nothing away from him. Linda and Peter were the donors. They surrendered valuable remainder interests and received nothing in return. That is the textbook definition of a gift.
What the 2024 opinion left open was the hard question. What were those remainder interests worth?
Why $117 million turned into $35 million each
The IRS said $53,408,746 per child. The children said $156,000 — essentially nothing — on the theory that Bruce’s power of appointment could have written them out entirely, so a hypothetical buyer would have paid almost nothing for their interests.
Judge Halpern rejected both, and the reasoning is the part worth carrying into practice.
First, the power of appointment did not reduce the value. Clotilde’s will required that on termination, distributees receive “assets of a value equal to the value of their respective interest in the trust.” Had the family terminated the trust without specifying who got what, a Washington court would have honored her intent — and her intent, evidenced by the fact that she used a trust at all rather than leaving everything to Bruce outright, was that her children end up with something substantial.
Second, and more importantly for anyone who administers trusts: the Sec. 7520 actuarial tables do not control. The IRS argued the tables must govern remainder valuations. The court disagreed on a deeper ground than the children had even argued. Sec. 7520 says values “shall be determined” under the tables — but the Commissioner had quietly dropped the statute’s opening words, “For purposes of this title.” A trustee dividing trust assets on termination is not making a determination for purposes of the Internal Revenue Code. He is deciding what each beneficiary owns under state law.
The court anchored this in a rule older than the QTIP itself, quoting Morgan v. Commissioner, 309 U.S. 78, 80 (1940): “State law creates legal interests and rights. The federal Revenue Acts designate what interests or rights, so created, shall be taxed.” A trustee might consult the Sec. 7520 tables for guidance. He is not bound by them.
Third, the children won a real point. Because they let Bruce take everything, they escaped the Sec. 2207A(b) obligation to reimburse him for the gift tax he would otherwise have owed. What they gave up, the court held, was their distribution net of that avoided liability — dividing the pre-reimbursement value by 1.4 to reflect the 40 percent gift tax rate. That single holding cut roughly $14 million off each gift.
The Commissioner had conceded that if the tables did not apply and Sec. 2207A did, each gift was worth no more than $35,141,321. The court held him to it.
The honest counterargument
There is a fair case that nothing went wrong here. The family got what it wanted. Bruce received the assets, the children presumably understood they were deferring to their father, and the property remains in Bruce’s estate where it will be taxed at his death — which is exactly where the QTIP bargain always said it would land. Nobody evaded anything. The children may well have made this gift with open eyes and would make it again.
That is true, and it matters. A nonjudicial settlement agreement is a legitimate, valuable tool, and the answer to this case is emphatically not “never terminate a trust early.” Families have good reasons: a trust that has outlived its purpose, administration costs that dwarf the corpus, a beneficiary structure that no longer matches anyone’s life.
But the children in this case also spent four years litigating whether their gift was worth $156,000 or $53 million. Whatever they understood in 2016, they did not understand that.
The fiduciary read
Here is the sentence I would want every trustee to be able to say before a family signs anything: I can tell you what this will cost.
The failure in McDougall was not the termination. It was that nobody appears to have priced it. A remainder interest is property. Handing it to someone else is a transfer. And the moment a QTIP is involved, the transfer runs through Sec. 2519 and Sec. 2207A in ways that produce eight-figure consequences from a document that reads like family housekeeping.
Notice, too, where the valuation actually came from: Washington state law and the four corners of Clotilde’s will — not a federal table. That should change how a trust officer prepares for these conversations. North Carolina, Delaware, South Dakota and Tennessee each enact the Uniform Trust Code differently, and each state’s nonjudicial settlement provisions and rules of testamentary construction will drive what a beneficiary is actually entitled to on early termination. The governing instrument and the governing state are the analysis. The Sec. 7520 tables are a convenience, and after McDougall, an unreliable one.
None of this requires a trustee to be the family’s tax counsel. It requires something smaller and harder: refusing to let a document get signed on the assumption that unanimous consent is the same thing as no consequences. Everyone at that table in October 2016 agreed. Agreement was never the issue. The issue was that a $117 million trust does not stop being a taxable structure just because the people inside it are getting along.
A beneficiary can waive a right. What a beneficiary cannot do is waive the arithmetic.
Source: Tax Court Determines Value of Children’s Deemed Gift to Father (Trusts & Estates / WealthManagement.com), discussing McDougall v. Commissioner, T.C. Memo. 2026-58 (July 20, 2026). Educational only — not legal, tax, or investment advice.