When Courts Look Beyond the Paper: A Note Becomes a Gift

In our recent discussion of Estate of Fields, we examined how the Fifth Circuit Court of Appeals disregarded the formal structure of a late-life family limited partnership and pulled the underlying assets back into the decedent’s gross estate. The court looked past the documents to the timing, the retained benefits, and the absence of a genuine nontax purpose. 

A similar lesson emerges from the Tax Court’s decision in Estate of Spenlinhauer v. Commissioner (T.C. Memo. 2025-134, filed December 30, 2025). Together, the two cases reinforce a consistent theme: when intra-family transfers are made late in life, and the transferor continues to enjoy the property, courts will examine substance over form, and the formal paperwork often fails.

The Spenlinhauer Facts- A Very Generous Grandmother

At age 89, Georgia Spenlinhauer transferred her Massachusetts home to her son in exchange for a 30-year promissory note. She continued to live in the house until her death at age 95. No payments were ever made on the note. Near the end of her life the note was amended to raise the interest rate, restart a new 30-year amortization schedule, and add a self-canceling feature that would forgive any remaining balance at her death.

The estate treated the transaction as a sale and excluded the house from the gross estate. The Tax Court disagreed. It held that the full value of the residence was includible under IRC § 2036(a)(1) because Georgia had retained the right to possess and enjoy the property until her death. The note did not qualify as a bona fide sale for adequate and full consideration.

Why the Formal Structure Collapsed

The court applied heightened scrutiny to the intra-family arrangement and found multiple independent failures:

• No payments were made or documented, undermining any claim that a genuine debt existed;
• The self-canceling feature between family members carried a presumption of gift rather than debt;
• The repayment terms were commercially unrealistic, essentially requiring the mother to live well beyond any reasonable life expectancy; and
• Georgia’s uninterrupted occupancy supported an implied agreement that she would continue to enjoy the property.

In short, the transaction lacked economic substance. The note was treated as illusory, and the house remained in the estate.

The Parallel with Fields

Both Fields and Spenlinhauer illustrate the same judicial approach. In Fields, a rapidly formed limited partnership funded in the final weeks of life failed the bona fide-sale test. In Spenlinhauer, a promissory-note sale of a residence coupled with continued occupancy met the same fate. In each case, the court refused to respect the formal labels, partnership interest or installment note, when the practical reality showed retained enjoyment and an absence of arm’s-length dealing.These decisions also echo a broader caution we have raised about late-life planning generally. Transactions undertaken when health is declining, or death is foreseeable, invite closer examination. What might have been sustainable if implemented years earlier with consistent payments, realistic terms, and clear changes in control becomes vulnerable when executed late and administered loosely.Implications for Families and Advisors

Intra-family residential transfers structured as sales for a note, especially self-canceling notes, remain high-risk techniques when the parent continues to live in the home. The IRS and the courts routinely test whether the arrangement is a true sale or merely a disguised gift with retained use. Failure means estate inclusion, potential gift-tax issues, and the costs of controversy, precisely the sort of expensive, family-straining outcome that careful planning seeks to avoid.

More reliable alternatives exist for clients who wish to transfer a residence while retaining the right to live there for a period of years. A properly structured Qualified Personal Residence Trust (QPRT), for example, is a statutory mechanism designed for this purpose. It carries its own technical requirements and risks, but it does not depend on the fiction of a commercial note that no one intends to pay.

The deeper lesson remains consistent with the planning principles we regularly emphasize: substance matters. Courts look beyond the paper. Transfers that leave the transferor in essentially the same practical position as before, continuing to live in the house, receiving no payments, amending terms late in life, will struggle to withstand scrutiny.

For families, the safest course is still early, well-documented planning that produces real changes in ownership and control, accompanied by contemporaneous evidence of legitimate purpose. When those elements are missing, even carefully drafted notes and partnership agreements can be set aside, leaving the estate and the beneficiaries with unexpected tax bills and unanticipated legal expenses, as well as the residue of conflict. Spenlinhauer is a useful companion to Fields in making that point clear.

Thanks to Wealth Strategies Journal for the report and article idea.

   

When Family Ties Turn Tangled: Lessons from Tharrett v. Everett on Trusts, Troublesome Beneficiaries, and the Power of Proactive Planning

In the worlds of estate and trust planning, aging-in-place planning, and business succession planning, a well-crafted revocable living trust isn't just a tool for avoiding probate, it's a shield against very real risks that can derail your legacy. Among these, and perhaps the most profound and intimate risk, is family discord.  The recent Kansas Supreme Court decision in Tharrett v. Everett, No. 125,999 (Kan. Aug. 8, 2025) , drives this home with a cautionary tale of sibling rivalry, delayed distributions, and mounting legal fees. Here, a beneficiary's persistent objections turned a straightforward trust wind-up into a multi-year battle, costing the estate, and ultimately the disruptor, thousands in attorney fees. For seniors and their families, this case underscores why trusts must be structured to deter "cake-and-eat-it-too" tactics from beneficiaries and to provide practical strategies for handling those who simply want to stir the pot. Let's break down the case, explore its implications, and chart a smarter path forward.

The Case: A Trust in Turmoil
Roxine Poznich, like many aging individuals, established a revocable living trust to efficiently distribute her assets to her five children upon her death in 2020. She named her daughter Sarah Tharrett as successor trustee, a common choice for its familiarity and cost-effectiveness. But family dynamics can upend even the best-laid plans. Roxine's son, David Everett, quickly challenged Sarah's role, filing a lawsuit in May 2021 to remove her as trustee. The suit was dismissed, but the damage was done: tensions simmered.
By October 2021, Sarah issued a final trust report and proposed distribution, which four siblings approved. David, however, objected, stalling the trust's closure and forcing Sarah to file a declaratory judgment action in June 2022 under Kansas statutes (K.S.A. 60-1701 et seq. and K.S.A. 58a-201(c)). The district court sided with Sarah: It approved the distribution, discharged her as trustee, ordered the payout of remaining funds, and, crucially, awarded Sarah $4,000 in attorney fees from David's share for the "extraordinary services" needed to defend the trust.
David cashed his distribution check but appealed anyway, arguing the judgment was void due to due process violations (e.g., inadequate notice and access to trust documents). The Kansas Court of Appeals dismissed the appeal in May 2024, ruling that by accepting the benefits, David had "acquiesced" to the judgment and couldn't now challenge it inconsistently. It also denied Sarah's request for appellate attorney fees.
The Supreme Court granted review and, in an August 2025 opinion, largely affirmed but with a pivotal reversal. It rejected David's void-judgment claim outright: due process issues don't void a ruling unless they strip personal jurisdiction entirely, and David's active participation (filings, motions, in-person appearances) belied any such argument. The Court upheld acquiescence as a jurisdictional bar; David couldn't accept the payout (the "cake") and still fight for more (eat it too). The court reversed, however, on fees, awarding Sarah an additional $11,320 in appellate attorney fees under Supreme Court Rule 7.07(b)(1) and K.S.A. 58a-1004. Why? Equity demanded it: David's "repeated meritless attempts to get more money" had unjustly burdened the trustee and trust, and courts retain jurisdiction over fee disputes even when the merits are off-limits.
As the Court noted, quoting Kansas trust law: "[i]n a judicial proceeding involving the administration of a trust, the court, as justice and equity may require, may award costs and expenses, including reasonable attorney fees, to any party, to be paid by another party or from the trust." This wasn't punitive (David's appeal wasn't deemed frivolous) but a fair allocation of costs to preserve the trust's integrity.The Takeaway: Trusts Serve as a Bulwark Against "Cake-and-Eat-It-Too" BeneficiariesWhat strategic angle should elder law planners take from Tharrett? Lean into trusts as proactive deterrents against beneficiaries who demand their inheritance while waging war on the process. In this case, David's acquiescence doctrine, rooted in Kansas precedent, served as a trapdoor: once he pocketed his share, the courthouse doors slammed shut on his appeals. This isn't unique to Kansas; similar rules apply in most states, preventing "inconsistent positions" that could "moot" challenges.
For aging clients, the message is clear: A revocable living trust, when properly drafted and funded, creates enforceable boundaries. Unlike probate, where courts micromanage distributions, trusts empower trustees to act decisively, distribute assets, seek court approval if needed, and surcharge objectors for bad-faith delays. Tharrett shows how this protects against "cake-and-eat-it-too" tactics.  Beneficiaries can't cherry-pick benefits while litigating the rest. Planners should emphasize in client consultations: "Your trust isn't just a distribution vehicle; it's a family peacekeeper, with teeth to enforce compliance."Handling Beneficiaries Who Just Want to Make Things DifficultEven the best families have outliers, those who object not from genuine grievance but to exert control or vent unresolved issues. Tharrett's David exemplifies this: his initial removal suit failed, yet he persisted, blocking closure for months and racking up fees. How do trustees (and planners) respond?

•Document Everything: From the outset, maintain meticulous records of communications, accountings, and approvals. Sarah's final report, approved by most siblings, isolated David's objections as outliers, strengthening her declaratory action.

•Invoke Statutory Tools Early: Under laws like K.S.A. 58a-1004 (mirrored in the Uniform Trust Code, adopted by 36 states), trustees can petition courts for instructions, distributions, and fee awards against unreasonable challengers. In Tharrett, this allowed surcharging David's share without depleting the whole trust.

•Leverage No-Contest Clauses: Draft trusts with in terrorem clauses that disincentivize frivolous challenges, e.g., forfeiture of a beneficiary's share for groundless contests. While Kansas enforces these judiciously, they deter most would-be troublemakers.  These can be expanded to include meritless or retaliatory legal actions that frustrate efficient trust administration.  

•Mediation Mandates: Build in requirements for mandatory and binding alternative dispute resolution before litigation. This cools tempers and often resolves issues without court, preserving relationships (and funds) for aging-in-place needs like in-home care.

•Appoint Neutral Successors: For high-conflict families, name a professional trustee (e.g., bank or trust company) as successor, reducing accusations of bias.

•Peace and Tranquility Clauses:  Consider including a provision that permits a trustee to surcharge a beneficiary who causes unreasonable costs or delays, or takes actions that unnecessarily increase the cost of administration.  Such a provision might deter a recalcitrant beneficiary, but if unsuccessful, it ensures that the resulting costs and expenses are borne equitably by the beneficiary who caused them. 

The case reminds us: when breach of fiduciary duty isn't evident (as here, with no proof of wrongdoing by Sarah), trustees should push for closure. Beneficiaries must accept distributions and final reports or face consequences.Why the Attorney Fees Ruling is a Game-Changer for ClosureThe Supreme Court's fee reversal is gold for elder law advocacy: it positions costs as a "reality check" for reluctant beneficiaries. In Tharrett, the $11,320 award, based on an attorney's affidavit and factors like reasonableness under Kansas Rule of Professional Conduct 1.5, wasn't about punishing David but equitably shifting the burden of his "meritless attempts." This aligns with the Court's view that trustees shouldn't bear personal costs for defending the settlor's intent.
For clients, highlight this as a reason to embrace finality.  "Accept your distribution and report because fighting it could cost you more than you gain." In low-stakes disputes (no clear breach), it encourages settlements, speeding assets to heirs for real needs. Planners can use Tharrett to illustrate that fees aren't optional; they're a trust's self-defense mechanism.Conclusion: Structure Your Trust to Safeguard Your LegacyTharrett v. Everett isn't just a win for trustees—it's a blueprint for efficient and effective trust administration. By deterring obstructive beneficiaries, enabling swift resolutions, and equitably allocating costs, revocable trusts ensure your assets support independence and  private administration, not costly public infighting. If family tensions loom, consult an elder law attorney now to fortify your plan with anti-litigation provisions. Don't let a David's delays dim your golden years—plan decisively, and let equity do the rest.
For the full opinion, see Tharrett v. Everett on Google Scholar.