On July 20, 2026, the US Tax Court issued a consolidated opinion in Lewis v. Commissioner and McDougall v. Commissioner, T.C. Memo. 2026-58, addressing how to value taxable gifts arising from the early termination of a residuary trust. The decision has meaningful implications for high-net-worth (HNW) and ultra-high-net-worth (UHNW) planning, particularly for QTIP trusts, spousal lifetime access trusts (SLATs), and negotiated trust modifications used by cross-border families.
The court’s holdings. The Tax Court reached three interrelated conclusions. First, the value of the taxable gifts made upon termination of the residuary trust must be determined by ignoring the possible exercise of a testamentary limited power of appointment held by a beneficiary. In other words, a mere theoretical power to redirect assets at death does not reduce the current gift tax value. Second, the value must be determined under state law principles governing the underlying property interests rather than by mechanical application of the actuarial tables prescribed under section 7520 of the Internal Revenue Code. Where state law produces a different valuation than the section 7520 tables, state law controls in this context. Third, the value of the gifts must be reduced by any avoided gift tax reimbursement obligations under section 2207A that would otherwise have applied. This preserves for the taxpayer the economic benefit of reimbursement obligations that no longer need to be satisfied.
Broader significance. Coming just months after the One Big Beautiful Bill Act made the 15 million dollar federal estate and gift tax exemption permanent effective 2026, the decision arrives at a moment when many HNW and UHNW families are actively revisiting trust structures, considering early terminations, and evaluating whether to accelerate transfers. The Lewis and McDougall framework provides important guidance in three respects. It confirms that testamentary limited powers of appointment do not automatically diminish gift tax value in early termination scenarios. It reinforces that state law valuation principles have real teeth in federal transfer tax analysis and that mechanical reliance on section 7520 actuarial tables is not always appropriate. And it offers a taxpayer-favorable framework for netting out section 2207A reimbursement obligations that were rendered moot by the termination.
Practical implications. For clients considering trust modifications, decantings, or terminations, the decision counsels careful state law analysis of the underlying property interests, particularly where the trust is governed by a jurisdiction (such as Delaware, South Dakota, Nevada, or Florida) with well-developed trust law. Advisors should not assume the section 7520 actuarial tables control every valuation question. For QTIP trust planning and portability elections, the interaction between section 2207A reimbursement obligations and gift tax value is now clearer and can be integrated into modeling of trust modification proposals. For cross-border families with US resident beneficiaries or US-situs trust property, the decision is particularly relevant because it may inform how foreign trust migrations, changes of situs, or early terminations are structured to manage US gift tax exposure. Coordination between US trust counsel, Portuguese and Brazilian tax counsel, and family office professionals is advisable before undertaking any material trust modification in the current environment.
Source: KPMG US; Wealth Management