Unwinding Mom's Trust Cost the Kids a $35 Million Gift Apiece
This cost the kids each at least $10 million including gift tax and interest
The Tax Court just finished the story it started in 2024, and the ending is expensive. In McDougall v. Commissioner (T.C. Memo. 2026-58, filed July 20, 2026), the court held that two adult children each made a taxable gift of $35,141,321 to their father — simply by agreeing to collapse their late mother’s trust and let Dad take everything. If your estate plan runs through a QTIP trust, and someday the family wants to “simplify things,” this case is a warning worth reading.
The setup
Clotilde McDougall died in 2011. Her will left the residue of her estate — mostly her share of a family real estate business inherited from her own father — to a Residuary Trust. Her husband Bruce got the income for life plus a limited power to appoint the principal among Clotilde’s descendants. The couple’s two children, Linda and Peter, held the remainder — whatever was left when Bruce died. Bruce’s estate made a QTIP election on the trust, so no estate tax was due at Clotilde’s death; the property would instead be taxed in Bruce’s estate later.
In 2016, the family decided to unwind it. They signed a nonjudicial agreement that terminated the trust and handed all of the assets — stipulated at $117.6 million — outright to Bruce. The children walked away with nothing.
Round one: who made a gift?
In the first McDougall opinion (163 T.C. 112 (2024)), the court sorted out the direction of the gifts. Bruce made no gift — because of the QTIP rules he was already treated as owning the property, so ending up with it outright didn’t transfer anything away from him. But Linda and Peter were a different story. They gave up valuable remainder interests and got nothing in return. That is the textbook definition of a gift. What the court left open was the hard part: what were those remainder interests actually worth?
