What the Remaindermen Gave Away.

On 20 July 2026, the United States Tax Court held that each of them had made a taxable gift of $35,141,321. Linda M. Lewis, Donor v. Commissioner; Peter F. McDougall, Donor v. Commissioner, T.C. Memo. 2026-58, Docket Nos. 2459-22, 2460-22 (filed 20 July 2026) (Halpern, J.).

Lewis and its companion, McDougall v. Commissioner, are gift tax cases, and the tax analysis is worth the attention of anyone who advises on trust modification. But the lesson that belongs in this series is not a tax lesson. It is that consent is a transfer. The instruments that give a modern trust its flexibility — nonjudicial settlement agreements, modifications, decantings, terminations by consent — are exercises of property rights, and a beneficiary who signs one has disposed of something. What the tax law calls a gift, creditor law calls a transfer for less than reasonably equivalent value. The signature is the same signature.

Clotilde McDougall died in December 2011. Her will created a Residuary Trust, funded principally with her interest in a family real estate business that she had herself inherited from her father.

The architecture was conventional and, on its face, sound. Her surviving spouse, Bruce, was entitled to the trust’s net income annually, with discretionary distributions of principal available to him, and he held a testamentary limited power of appointment over the principal. Her two children, Linda M. Lewis and Peter F. McDougall, held the remainder interests. The qualified terminable interest property regime applied to the trust, which is why I.R.C. §§ 2519 and 2207A later did so much work in the litigation.

In other words: income and flexibility for the widower during his life; the family business to the children at the end of it; and, in the meantime, everything held in trust.

Then, on 31 October 2016, the family executed a nonjudicial agreement terminating the trust. The entire remaining corpus — $117,604,143 — was distributed to Bruce outright and free of trust.

The first decision in this litigation, McDougall v. Commissioner, 163 T.C. 112 (2024), addressed Bruce’s position. Section 2519 treats a surviving spouse’s disposition of a qualifying income interest as a transfer of the entire remainder. The Tax Court held that Bruce made no section 2519 gift on these facts, because the transaction left him with outright ownership of everything: he parted with nothing.

Which left the obvious question. The corpus moved. Someone’s property rights were extinguished. If it was not the life tenant who gave, it was the remaindermen.

The 2026 opinion, from Judge Halpern, answers that question and then spends its length on how much.

The children’s gift, the court held, was measured by “the value of the terminating distributions the children would have been entitled to receive under the terms of the will had they not agreed to distribute everything to their father.” Lewis, T.C. Memo. 2026-58. They surrendered enforceable interests under their mother’s will and received nothing in return.

Pause on how ordinary the underlying transaction was. There is no suggestion of concealment, and no creditor anywhere in the case. This was a family simplifying an inherited structure, in a document their advisers approved, using a mechanism — the nonjudicial agreement — that exists precisely to spare families the cost of going to court. The Tax Court’s answer was not that they had done anything improper. It was that what they had done was a transfer of property, and the transfer tax system does not care what the parties called it.

The taxpayers’ principal argument was a valuation argument, and its failure is instructive.

Because Bruce held a testamentary limited power of appointment over the principal, they contended, the children’s remainders were worth very little — an alternative figure of roughly $156,000 was advanced. The father could, after all, appoint the property elsewhere.

The court rejected it as “manifestly contrary to the intent reflected in Clotilde’s will,” and added the sentence that decides the case: “had Clotilde wanted to leave all her assets to Bruce she could easily have done so by bequeathing all her property to him free of trust.” Id. Under Washington law, the court held, a court would presume distribution in equal shares to the children on Bruce’s death, disregarding the unexercised power.

The court then made a point of general importance well beyond this case. “[S]tate law defines property rights, while federal law governs their taxation,” it observed, citing Morgan v. Commissioner, 309 U.S. 78 (1940). The trustee’s determination of the beneficiaries’ substantive rights under the will was a state-law exercise, not a federal valuation exercise, and the section 7520 actuarial tables did not control it: “A trustee might look to the section 7520 tables for guidance, but we do not agree that those tables would be determinative.” Id.

That division of labour is the one that matters here. What you own is a question of state trust and property law. What happens to it — whether it is taxed, and whether a creditor can reach it — follows from that answer. It is the same sequence a court runs in a creditor case: identify the property interest under state law first, then ask what may be done to it.

Two further holdings round out the arithmetic and are worth knowing.

The court accepted a net gift reduction under section 2207A. Had the children taken their remainder distributions rather than surrendering them, Bruce would have made a deemed section 2519 transfer and incurred gift tax, which he could have recovered from them under I.R.C. § 2207A(b). What each child in fact gave up was therefore “the distribution he or she would have received net of the avoided liability to reimburse Bruce for gift tax.” Id. Dividing the pre-adjustment remainder values by 1.4 — reflecting the forty per cent maximum marginal gift tax rate — properly captured the avoided obligation.

The court declined, however, to adjust Bruce’s life expectancy downward on the basis that he was wealthy and in good health. His adjusted gross income of $2.2 million in 2015 alone did not justify departing from standard actuarial tables; the tables provide reasonable estimates under the law of large numbers, and selective adjustment introduces bias. Id.

Even after the section 2207A relief, each child’s gift stood at $35,141,321. The concession was substantial and it did not change the character of the event.

Now translate the holding out of the transfer tax and into the creditor context, because the doctrines run in parallel.

Under the Uniform Voidable Transactions Act, a transfer is voidable as to a creditor whose claim arose before the transfer if the debtor made it “without receiving a reasonably equivalent value in exchange” and was insolvent at the time or became insolvent as a result. Unif. Voidable Transactions Act § 5(a); see also id. § 4(a)(2), (b). No intent to hinder or delay need be shown. That is the constructive branch, and it is unforgiving precisely because it does not require anyone to have behaved badly.

A beneficiary who signs a nonjudicial settlement agreement surrendering a vested or contingent remainder is, on the Lewis analysis, transferring property. If that beneficiary has creditors — a pending claim, a personal guarantee, a professional exposure, a marriage in difficulty — the signature is exposed to exactly that attack. And the Tax Court has now supplied the other side with a fully reasoned framework for valuing what was surrendered.

The point generalises. Every flexible-trust technique this profession has spent two decades building is, viewed from the creditor’s chair, a movement of property:

• A nonjudicial settlement agreement is a disposition by every beneficiary who signs it.
• A decanting is a transfer by the trustee, and its timing relative to a claim is the whole of its evidentiary character.
• A trust termination for administrative convenience is a distribution, and distribution is the moment protection ends.
• A disclaimer has its own statutory rules, and they are not the same rules; qualified disclaimers under I.R.C. § 2518 are treated differently for both tax and creditor purposes in ways that vary sharply by jurisdiction.

None of these is improper. All of them are legitimate and often correct. The discipline is that each should be done on a clear day and documented at the time with the reason it was done — because the same act performed after a claim appears is a different act in every court that will later examine it.

Set the tax to one side for a moment and look at what the 2016 agreement actually accomplished as a matter of protection.

Before it: $117.6 million held in trust under a will, administered by a trustee, with a life tenant holding an income right and a limited power, and remainders held by two children who could not reach the principal.

After it: $117.6 million owned outright by one seventy-something individual, in his own name, subject to his own creditors, his own liabilities, his own capacity to be persuaded, and whatever his own estate plan turned out to say.

Every protective feature was surrendered at once. The trust was irrevocable and it was dissolved. It was independently administered and administration ceased. It was seasoned — settled by a decedent in 2011, unimpeachably free of any creditor motive — and that seasoning, which cannot be manufactured and cannot be bought back, was thrown away for a simplification.

That is the part of this case that has nothing to do with the Internal Revenue Code. A structure that had every quality one would want was ended by consent, and the consent turned out to be worth $70 million in gift tax exposure between two siblings. The tax bill is the visible cost. The invisible cost is the protection that a trust settled fifteen years ago provided, and no longer provides, to a family that owns a substantial operating business — which is to say, a family with exactly the risk profile that trusts exist to address.

Lewis will be read in tax practices as a valuation case about powers of appointment, section 7520 and net gifts, and it is a good one.

Read it also as a warning about the ease of unwinding. The mechanisms that let families adjust trusts without a judge are genuine improvements on what came before. They are also, in the hands of a family that has stopped asking why the trust was there, a fast route out of protection that took a generation and a death to create.

Before any beneficiary signs a consent, modification, termination or decanting, two questions are worth putting on the record: what am I giving up, and to whom? The Tax Court has now answered the first question with a number. The second question — whether a creditor, a spouse or a claimant is standing anywhere in the picture — is one the family must answer for itself, honestly, before the pen moves rather than after.

A trust that is dissolved by agreement protects no one. It just does it quietly, and with everyone’s signature on the page.

This note is general commentary for informational purposes and is not legal advice for any specific matter. Transfer tax outcomes, the availability and effect of nonjudicial settlement agreements, decanting powers, disclaimers and voidable transaction rules all vary materially between jurisdictions and turn closely on the terms of the instrument and the facts.