Lurie, Ann v. CIR ( 2005 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 04-3800
ANN LURIE, Executor of the estate
of ROBERT H. LURIE, deceased,
Petitioner-Appellant,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent-Appellee.
____________
Appeal from the United States Tax Court
No. 22639-94.
____________
ARGUED JUNE 6, 2005—DECIDED SEPTEMBER 30, 2005
____________
Before ROVNER, WOOD, and WILLIAMS, Circuit Judges.
WILLIAMS, Circuit Judge. This case is an example of how
the best laid plans of mice and men can often go awry. Prior
to his passing, the decedent, Robert H. Lurie, planned for
the bulk of his wealth to be excluded from federal estate
taxes and passed through various trust instruments set up
for the benefit of his wife and children. The Commissioner
of Internal Revenue, however, determined that the trusts
formed for the benefit of the children, valued at approxi-
mately $40,471,059, should be included in Lurie’s gross
estate for tax purposes. This determination left the funds
remaining in the probate estate insufficient to pay the
estate tax deficiency, calculated by the Tax Court to be
2 No. 04-3800
$12,214,209.42. The estate does not appeal the calculations
of the Tax Court, but only appeals the Tax Court’s ruling
that the deficiency, as well as the legal costs arising from
this dispute, must be paid by the executor, Mrs. Ann Lurie,
out of the trust set up for Mrs. Lurie’s benefit, instead of out
of the trusts set up for the decedent’s children that gener-
ated the tax deficiency. We agree with the ruling of the Tax
Court and, therefore, affirm.
I. BACKGROUND
The underlying facts in this case are undisputed. Robert
Lurie (“decedent”) died on June 20, 1990, leaving assets
worth approximately $130 million. He was survived by
his wife, Ann Lurie, and six children, who were minors
when he died.
In May 1969, at the start of Robert Lurie’s career, his
mother created ten trusts which came to be known as the
Robert Lurie Family Trusts (“the LF Trusts”). Lurie had
a limited power of appointment over the LF Trusts, and
exercised that power in February 1990 to create six new
trusts, one for the sole benefit of each of his six minor
children. The six new trusts received all of the assets of the
LF Trusts. Lurie also held a power of appointment with
respect to ten trusts, known as the “RD” trusts. Lurie
exercised his power of appointment over the RD trusts and
created ten new trusts to succeed and receive the assets
of the RD trusts. Both parties and the Tax Court referred to
the LF Trusts, the RD Trusts, and their successor trusts
collectively as the “Notice Trusts.”
Lurie created the Revocable Trust, of which he was both
grantor and trustee, on December 19, 1989, three days
before he executed his will. The Revocable Trust Agreement
provides that upon Lurie’s death the assets of the Revocable
Trust would be allocated between a “Marital Trust” and a
nonmarital “Residuary Trust.” Article III of the trust
No. 04-3800 3
instrument deals with the creation of the Marital Trust.
Specifically, the allocation provision states in relevant part:
3.2 Amount of Allocation to Marital Trust. The
allocation herein to the Marital Trust shall have a
value equal to the smallest pecuniary amount
which, if allowed as a federal estate tax marital
deduction, would result in the least federal estate
tax being payable by reason of the Grantor’s death,
taking into account the maximum available unified
credit and the credit for state death taxes, but only
to the extent that those state death taxes are not
thereby increased.
The Residuary Trust is established pursuant to section
4.2. Section 4.2 provides that, upon Lurie’s death, the
remainder of the trust estate not allocated to the Marital
Trust or used for the payment of the debts and expenses
of Lurie’s estate was to be allocated into a Residuary
Trust for the benefit of Mrs. Lurie and his children.
Section 4.1 of the Revocable Trust instrument provides
that if the residue of the probate estate was insufficient,
then any remaining expenses from the administration of his
estate were to be paid from the Revocable Trust. In relevant
part:
4.1 Debts and Taxes. Upon the death of the
Grantor, the Trustee shall, to the extent that the
assets of the Grantor’s estate . . . are insufficient,
pay . . . reasonable expenses of administration of
his estate . . . all income, estate, inheritance,
transfer and succession taxes, including any inter-
est and penalties thereon, which may be assessed
by reason of the Grantor’s death, without reim-
bursement from the Grantor’s Executor or Adminis-
trator, from any beneficiary of insurance upon the
Grantor’s life, or from any other person. . . . All
such payments shall be charged first against the
principal of the trust estate. . . .
4 No. 04-3800
Lurie executed his will on December 22, 1989. Mr. Lurie’s
will directs that his personal effects be distributed to his
wife and that any residuary, after payment of debts, funeral
expenses, costs of administration, taxes and legal expenses,
be distributed to the Revocable Trust. The will references
the Revocable Trust Agreement and states that the trust
agreement governs the administration and distribution of
the residue estate which includes the payment of estate
taxes and legal fees ordinarily payable from the residue
estate. See Section 2.1 of the Will of Robert Lurie dated
December 22, 1989.
At Lurie’s death, the value of his probate estate was
$760,253. The value of the Revocable Trust at his death was
$88,659,780. In accordance with the decedent’s will, his
personal effects valued at $12,470 were bequeathed to his
wife, leaving a residuary probate estate of $747,783. After
payment of funeral expenses and administrative expenses,
the residue of the probate estate was distributed to the
Revocable Trust. Lurie had made gifts during his lifetime
which fully absorbed the unified credit, so the nonmarital
Residuary Trust was never formed, and the Revocable Trust
distributed all of its assets to the Marital Trust for the
benefit of Mrs. Lurie. On its federal estate tax return, the
estate reported a gross estate of $91,712,318, which did not
include the value of any of the Notice Trusts. The estate
claimed a marital deduction in the amount of $91,682,908,
and other deductions in the amount of $29,410, resulting in
a taxable estate of zero.
Upon an audit by the Internal Revenue Service, the
Commissioner of Internal Revenue determined that the
Notice Trusts should have been included in the decedent’s
gross estate and, as a result, calculated a $47,459,641
deficiency in the decedent’s taxable estate. The increase in
the taxable estate unsurprisingly led to an estate tax
deficiency, which in turn left the residual probate estate
insufficient to the outstanding expenses of the estate. The
No. 04-3800 5
estate then petitioned the Tax Court for a redetermination.
Before the Tax Court, the parties eventually stipulated
that the Notice Trusts would be included in the decedent’s
gross estate at a total value of $40,461,079, but left it to the
Tax Court to decide whether the resulting estate taxes,
payable as a result of including the value of the Notice
Trusts in the decedent’s gross estate, were payable from the
Revocable Trust assets that otherwise would have gone to
the Marital Trust, or from the Notice Trusts that generated
the tax. In addition, the parties left it to the Tax Court to
decide whether the legal costs associated with the audit and
the ensuing litigation should be paid by the Revocable Trust
or the Notice Trusts.
The Tax Court found that section 4.1 of the Revocable
Trust instrument provided for payment of estate taxes
and legal costs if the residuary probate estate was insuffi-
cient, and that, in accordance with that provision, the estate
taxes and legal costs should be paid out of Revocable Trust
assets that otherwise would go to the Marital Trust. The
Tax Court calculated the estate tax deficiency to be
$12,214,209.92.
II. ANALYSIS
The standards of review governing the review of a
decision by the Tax Court are the same as those govern-
ing the review of a district court determination in a civil
bench trial. 26 U.S.C § 7482(a). Questions of law are
reviewed de novo; the Tax Court’s factual determinations,
as well as the application of legal principles to those factual
determinations, are reviewed only for clear error. Pittman
v. Comm’r of Internal Revenue, 100 F.3d 1308, 1312-13 (7th
Cir. 1996).
6 No. 04-3800
Section 2001 of the Internal Revenue Code (I.R.C.)1
imposes a tax “on the transfer of the taxable estate of every
decedent who is a citizen or resident of the United States.”
In computing the taxable estate, the I.R.C. provides for a
marital deduction that permits an estate an unlimited
deduction from the gross estate for the value of any prop-
erty that passes from a decedent to the decedent’s spouse.
I.R.C. § 2056. The estate then is only required to pay estate
tax on transfers not qualifying for the marital deduction,
such as transfers to beneficiaries other than the surviving
spouse. I.R.C. § 2056(b)(4). Typically, the resulting estate
tax is paid from property that otherwise would pass to the
surviving spouse, thereby reducing the marital deduction by
that amount of federal estate tax. State law controls,
however, how the estate tax burden is allocated among the
assets of an estate. Riggs v. del Drago, 317 U.S. 95, 101
(1942). Here, the decedent was domiciled in Illinois when he
died, so Illinois law governs how his estate tax is to be
allocated. Doetsch v. Doetsch, 312 F.2d 323, 328 (7th Cir.
1963).
Illinois has no statute specifying which assets of the
taxable estate bears the burden of any estate tax, but
the default rule in Illinois is the rule of equitable apportion-
ment, which means that the burden of estate taxes
is allocated pro rata to the portions of the taxable estate
that generated the tax. See Roe v. Farrell’s Estate, 372
N.E.2d 662, 665 (Ill. 1978) (applying the rule of equitable
apportionment to an intestate estate, where a person dies
without leaving a valid will). “[L]ogic, reason, and simple
justice dictate that, unless there is a contrary intention
expressed by the decedent, as in a will in testate estates,
the doctrine of equitable contribution should be invoked
as to nonprobate assets to fairly distribute the federal
1
I.R.C. references are to the Internal Revenue Code of 1986
(26 U.S.C.) in effect as of the date of the decedent’s death.
No. 04-3800 7
estate tax burden.” Roe, 372 N.E.2d at 665 (quoting In re
Estate of Van Duser, 313 N.E.2d 228, 229 (Ill. App. Ct.
1974)); see also In re Estate of Gowling, 411 N.E.2d 266, 269
(Ill. 1980) (applying the rule of equitable apportionment in
a testate estate, where a person dies with a valid will).
This leads to the ultimate question in this case: whether
the decedent expressly intended not to have the rule of
apportionment apply. The estate argues that since the
decedent did not leave specific instructions in his will
negating equitable apportionment in the event the residu-
ary probate estate was insufficient to cover estate taxes,
then the rule of apportionment should apply. A closer
reading of the will, however, leads us to believe that the will
is not silent.
The decedent’s will specifically references the Revocable
Trust Agreement and directs that the Revocable Trust
Agreement governs the administration and distribution
of the residue estate. See Section 2.1 of the Will of Robert
Lurie dated December 22, 1989. The administration of
the decedent’s residue estate includes the payment of estate
taxes and legal fees ordinarily payable from the residue
estate, and section 4.1 of the Revocable Trust Agreement
specifically details that the Revocable Trust shall, “to the
extent that the assets of the Grantor’s estate . . . are
insufficient, pay the . . . reasonable expenses of administra-
tion of his estate.” Thus, we find that the decedent in his
will gave specific instructions as to how the residual estate
was to be administered and how the expenses of his estate
were to be handled in the event the residue estate was
insufficient and sufficiently intended to negate the default
rule of apportionment.
The estate also argues that the Tax Court erred in
reviewing both the valid will and a trust agreement left
by the decedent in order to conclude that the decedent
intended to negate apportionment. The estate contends that
8 No. 04-3800
the Tax Court did not heed “the established Illinois rule”
that the decedent’s intent as to the source of assets to be
used for payment of estate taxes and whether to negate the
doctrine of equitable apportionment can only be determined
from his will. See Appellant’s Opening Brief at 13 (emphasis
added). We find that this argument overstates Illinois law.
We find that case law in Illinois has merely recognized
that a decedent can avoid the application of equitable
apportionment by expressing the intent not to have appor-
tionment apply in his will. Roe, 372 N.E.2d at 665; In re
Estate of Grant, 415 N.E.2d 416, 417 (Ill. 1980). We
have found no case in Illinois instructing us that we
must limit our search for the decedent’s intent to negate
equitable apportionment to only the decedent’s will. Our
review of Illinois law leads us to conclude that the dece-
dent’s intent as expressed in the language of a will or a
trust instrument can control both what source of assets
shall be used to pay estate taxes and whether equitable
apportionment applies. See, e.g., Harris Trust & Sav. Bank
v. Donovan, 582 N.E.2d 120 (Ill. 1991) (construing both a
trust instrument and a will to determine that decedent’s
“illegitimate” children, as defined by both the will and trust
agreement, were disinherited by necessary implication);
Frederick v. Lewis, 517 N.E.2d 742 (Ill. App. Ct. 1988)
(construing the terms of a trust agreement to determine
that the trust instrument did not negate apportionment);
Harris Trust & Sav. Bank v. Taylor, 364 N.E.2d 349, 354
(Ill. App. Ct. 1977) (construing the language of a trust
instrument to determine an intent to preclude apportion-
ment).
In Donovan the issue before the court was whether the
“illegitimate” children of the decedent were entitled to
any interest in the family trust established by the decedent.
582 N.E.2d at 121. The decedent executed both a trust
instrument and a will within three days of each other, and
No. 04-3800 9
the court reviewed both instruments to determine whether
the decedent’s “illegitimate” children, as defined by both the
will and trust agreement, were disinherited by necessary
implication. 582 N.E.2d at 123. In construing both the trust
agreement and the will, the court stated:
If possible, the court should construe the will or
trust so that no language used by the testator is
treated as surplusage or rendered void or insignifi-
cant. . . . Every word, phrase and clause in a will
should be given effect, if possible, and where one
construction of a will would render a portion of [the
trust agreement] meaningless and another con-
struction would give effect to all provisions and all
language, the construction giving effect to the latter
construction will be adopted.
582 N.E.2d at 123 (quotes and citations omitted).
The estate argues that Donovan is inapplicable to this
case because the court in Donovan looked to determine
the intent of the decedent to disinherit, whereas in this case
we are faced with discerning the intent of the decedent to
apportion estate taxes. We find this distinction to be of no
consequence as simply discerning the decedent’s intent is
the primary concern under Illinois law. We have not found
a case, and the estate does not cite a case, instructing us
that it makes a difference under Illinois law whether a
court is searching for the decedent’s intent to disinherit or
intent not to apportion taxes. Accordingly, Donovan exem-
plifies how a court applying Illinois law and attempting to
determine the decedent’s intent can consider both a trust
agreement and a will.
In Frederick, the appellate court considered whether
a trust instrument provided specific instructions for pay-
ing estate tax, and the Frederick court’s sole reason for
examining the trust instrument was to decide the dece-
dent’s intention regarding the source of payment of tax. 517
10 No. 04-3800
N.E.2d at 744 (“The ultimate question in this case
is whether the decedent gave specific directions for the trust
to pay the [estate] tax.”). In construing the terms of the
trust agreement, the court in Frederick stated:
The construction given terms of a trust are basi-
cally controlled by the same rules applying to wills,
with the intention of the settlor or testator being of
supreme importance. . . . This intention is ascer-
tained from the four corners of the instrument . . .
and is to be gathered from the will as a whole. . . .
This should be done by giving every word, phrase
and clause in the instrument effect, if possible.
517 N.E.2d at 744. Although the court in Frederick ulti-
mately concluded the trust instrument did not negate
apportionment, the court made it clear that, under Illinois
law, a decedent’s intent as expressed in a trust instrument
is relevant and can negate equitable apportionment.
In Taylor, the trustees of seven trusts joined in a com-
plaint requesting instructions as to the proper interpreta-
tion of a tax apportionment provision common to the seven
trust agreements. 364 N.E.2d at 351. The common tax
apportionment provision provided:
If any estate, inheritance or other succession taxes
or duties or transfer charges are assessed in con-
nection with any distribution of income or principal
hereunder, they shall be paid by the trustee or
successor trustee out of the principal of the trust
estate.
364 N.E.2d at 352. In reviewing the language of the trust
agreements, the appellate court held that the language used
in the tax apportionment provisions in question was
sufficient to express an intention to have estate tax burdens
apportioned. 364 N.E.2d at 354.
The estate has failed to cite a single Illinois case which
holds that a court can only look to the decedent’s will to
No. 04-3800 11
determine whether the decedent intended to negate equita-
ble apportionment. Thus, we conclude that the Tax Court
properly considered both the trust instrument and the
decedent’s will in order to discern the decedent’s intent to
negate the rule of apportionment.
The estate also argues that if it was proper for the Tax
Court to consider the Revocable Trust Agreement, then the
Tax Court did not properly analyze the instrument. Specifi-
cally, the estate argues that a review of the Revocable Trust
Agreement as a whole discloses the decedent’s “unmistak-
able” intent to maximize the marital deduction, an intent
inherently at odds with the waiver of equitable apportion-
ment. See Appellant’s Opening Brief at 28. The estate
contends that the Revocable Trust Agreement in section 3.2
plainly communicates the decedent’s intent to maximize the
marital deduction and not reduce it by the payment of
estate taxes.
We find that section 3.2 of the trust instrument con-
tains no express language of the decedent’s intent not to
reduce the Marital Trust by the payment of estate taxes
and contains no language barring the executor from using
trust estate funds otherwise eligible for the Marital Trust
for the payment of estate taxes. Contrary to the estate’s
argument, the express intent of section 3.2 is to maximize
the amount of the marital trust allowable under the federal
estate tax laws. Thus, section 3.2 anticipates that federal
estate taxes will be paid, and then creates a Marital Trust
up to the maximum allowed under the tax laws.
Construing section 3.2 as maximizing the Marital Trust
to the exclusion of federal estate taxes, as the estate
suggests, would allow the Marital Trust to consume the
entire Revocable Trust rendering section 4.1 surplusage.
A proper construction of section 3.2 as simply allocating
for a Marital Trust consistent with federal estate tax law
then enables section 4.1 to pay all income, estate, inheri-
12 No. 04-3800
tance, transfer and succession taxes from the Revocable
Trust to the extent that the assets of the decedent’s estate
are insufficient.
It is clear that the decedent did not anticipate that the
Notice Trusts would be included in his gross estate, and it
is very likely that the decedent would have laid out his
estate plan differently had he or his attorneys considered
this possibility. We cannot, however, rewrite the dece-
dent’s will or trust agreement to give effect to what the
decedent would have done. Under Illinois law and the law of
this circuit, the intent that we seek to enforce is not that
presumed to have been in the decedent’s mind, but rather
the intent that is expressed in the four corners of the
documents in question. See Smith v. United States, 801 F.2d
975, 977 (7th Cir. 1986) (quotations and citations omitted)
(interpreting Illinois law); Weir v. Leafgreen, 186 N.E.2d
293, 296 (Ill. 1962).
Finally, we find that the Tax Court correctly deter-
mined that the legal costs associated with the audit and
this litigation should be paid from the assets of the Revoca-
ble Trust. Again, section 4.1 of the Revocable Trust Agree-
ment directs that if the assets of the residuary probate
estate are insufficient, then the remaining administration
costs of the estate are to be paid from the assets of the
Revocable Trust. Since legal costs are considered adminis-
tration costs under Illinois law, see In re Rolley, 520 N.E.2d
302, 303 (Ill. 1998) (describing legal fees as costs of admin-
istration of an estate); In re Desisles’ Estate, 208 N.E.2d
122, 125 (Ill. App. Ct.1965) (costs of administration include
legal fees), the Tax Court was correct in directing the legal
costs associated with this litigation to be paid out of the
Revocable Trust.
III. CONCLUSION
For all the foregoing reasons, the decision of the Tax
Court is AFFIRMED.
No. 04-3800 13
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—9-30-05