DocketNumber: No. 13268-01
Citation Numbers: 87 T.C.M. 1097, 2004 Tax Ct. Memo LEXIS 68, 2004 T.C. Memo. 68
Judges: \"Vasquez, Juan F.\"
Filed Date: 3/17/2004
Status: Non-Precedential
Modified Date: 11/20/2020
2004 Tax Ct. Memo LEXIS 68">*68 Judgment entered for petitioner.
MEMORANDUM OPINION
VASQUEZ, Judge: Respondent determined a deficiency of $ 206,612 1 in the Federal estate tax of the Estate of Merle Allen Whiting, Jr. (decedent), and an addition to tax pursuant to
Background
The parties submitted this case fully stipulated pursuant to
Decedent was in the business of farm equipment sales. Around May 1996, 18 months before his death, decedent had an operation, after which the doctor informed him that he had terminal lung and colon cancer. Immediately following decedent's operation, the doctor estimated that decedent had a maximum of 2 years to live. Following his operation and terminal illness diagnosis, decedent ceased his regular activities. Decedent did not have any treatments that would have attempted to cure or slow his cancer.
Decedent's certified public accountant informed him that he needed an estate plan. On September 17, 1997, decedent and his wife, Vicki2004 Tax Ct. Memo LEXIS 68">*69 Ann Whiting (Mrs. Whiting), met with an attorney at the firm of Jewell & Moser concerning the drafting of an estate plan. Jewell & Moser is a six-attorney firm in Little Rock, Arkansas. Two attorneys are Arkansas board recognized specialists in tax law. One attorney is a certified public accountant. Two attorneys have a master of laws in taxation.
On October 13, 1997, decedent and Mrs. Whiting executed the Merle Allen Whiting, Jr., and Vicki Ann Whiting Trust (the trust). On the same date, decedent executed his last will and testament (the will). Decedent was aware that he was terminally ill with lung and colon cancer when he executed the trust and the will.
The draftsman of the trust prepared only one draft for decedent to review and execute. The intent of the draftsman was to create a marital deduction trust that qualified for the Federal estate tax marital deduction. Decedent read the trust and the will without asking any questions or raising any objections. Neither decedent nor Mrs. Whiting exchanged any correspondence with the draftsman of the trust or the will.
On November 4, 1997, 22 days after executing the trust and the will, decedent died. He was 50 years old. Mrs. Whiting2004 Tax Ct. Memo LEXIS 68">*70 survived decedent. She was 48 years old when decedent died.
The trust was initially funded with $ 10. During the 22-day period between the date the trust was executed and the date of decedent's death, substantial amounts of decedent's real estate holdings were transferred to the trust as trust corpus. Upon decedent's death, life insurance proceeds also funded the trust.
B. Terms of the Trust
1. Merle Allen Whiting, Jr., and Vicki Ann Whiting
Trust
Decedent and Mrs. Whiting were the grantors of the Merle Allen Whiting, Jr., and Vicki Ann Whiting Trust. While both grantors were alive, the trust was revocable.
Purpose. The stated purpose of the trust was to create a means "by which certain assets may be held for the benefit of the Grantor and the Grantor's loved ones * * * . It is the Grantor's intent in creating this trust that the Grantor's assets avoid probate at the time of the Grantor's death. All provisions of this trust shall be construed in such a manner as to best effect these intentions."
Grantors' Separate Trust Shares. Upon receipt of property in the trust, the trustee "shall establish an undivided separate trust share for Merle Allen2004 Tax Ct. Memo LEXIS 68">*71 Whiting, Jr., equal to fifty percent (50%) of the property received and an undivided separate trust share for Vicki Ann Whiting equal to fifty percent (50%) of the property received."
Death of First Grantor. Upon the death of the first grantor to die, "the Trustee shall divide the decedent's separate share of the trust into four (4) separate trusts." The first trust is the "Marital Deduction Trust" (marital deduction trust). The second trust is the "Madge Williams Whiting Evans Trust", established for decedent's mother. The third trust is the "Courtney Brook Whiting Phaffenberger Trust", established for decedent's daughter. The fourth trust is the "Non-Marital Deduction Trust".
The trust becomes irrevocable as to the deceased grantor's separate trust share immediately upon the death of the first grantor to die. Additionally, "the surviving Grantor shall have no right or power * * * to alter, amend, modify, revoke or terminate this Trust Agreement * * * as to the deceased Grantor's separate trust share."
2. Marital Deduction Trust
Amount of Distribution. The amount of the distribution from decedent's separate trust share to the marital deduction trust, as stated in
A distribution shall be made to this trust of an amount
equal to the excess, if any, of the decedent's taxable estate
(computed without any marital deduction) plus the amount of the
decedent's adjusted taxable gifts, over the exemption equivalent
of the then applicable unified credit against estate tax, said
excess being reduced by the aggregate value (using federal
estate tax values, as finally determined) of all property and
interests in property included in the decedent's gross estate
which qualifies for the federal estate tax marital deduction and
which pass or have passed in a form which qualifies for such
marital deduction from the decedent to the surviving spouse
pursuant to Will, by operation of law, pursuant to contract or
otherwise than by this provision.
The words "adjusted taxable gifts", "gross
estate", "marital deduction", "pass or have
passed", "taxable estate" and "unified credit
against estate tax" shall have the same meanings as such
words have under the Internal2004 Tax Ct. Memo LEXIS 68">*73 Revenue Code provisions applicable
to the decedent's estate * * *.
* * * * * * *
Only assets that qualify for the marital deduction shall be
available for selection by the Trustee in the fulfillment of
this distribution. Each asset selected by the Trustee to be
distributed in kind for the purpose of satisfying the amount of
this distribution to the surviving spouse shall be valued for
such purposes at the lower of:
(i) its fair market value at the time of distribution,
or
(ii) its value for federal estate tax purposes * * * .
Although the decedent's intent in directing this method of
valuation for distributions in kind in satisfaction of a
pecuniary bequest is to eliminate any recognition of gain with
respect to appreciated assets available for distribution, it
also has the result of qualifying the marital deduction for
estate tax purposes.
Terms. The relevant terms of the marital deduction trust, as stated in
A. Distribution of Income and Principal. After the
payment of all reasonable and necessary expenses incurred in the
management of the trust, the trustee shall distribute at least
annually the net income of the trust to or for the benefit of
the surviving spouse for the remainder of the surviving spouse's
life. Any income accrued, but undistributed, as of the date of
the surviving spouse's death shall be paid to the surviving
spouse's estate * * * .
The trustee is authorized to distribute to or for the
benefit of the surviving spouse so much of the principal of this
trust as in the trustee's absolute discretion may be necessary
or advisable for the health, education, maintenance and support
of the surviving spouse.
The surviving spouse is authorized to withdraw from the
principal of this trust such additional amounts as the surviving
spouse may request, provided that such distributions from the
principal of this trust shall not exceed in any calendar year
the greater of $ 5,000.002004 Tax Ct. Memo LEXIS 68">*75 or five percent (5%) of the value of
the principal of this trust * * *.
* * * * * * *
No distribution of the principal of this trust * * * shall
be made to or for the benefit of the surviving spouse following
the remarriage or cohabitation of the surviving spouse.
B. Termination of Trust. This trust shall terminate
upon the surviving spouse's death, at which time the remaining
assets of this trust shall be distributed as follows:
* * * * * * *
(2) The remaining balance shall be distributed to or in
trust for the benefit of such persons or entities * * * as
the surviving spouse may appoint by specific reference to
this trust in the surviving spouse's Last Will and
Testament, provided that no appointment shall be made to
the surviving spouse, the surviving spouse's estate, the
surviving spouse's creditors or the creditors of the
surviving spouse's estate. In partial2004 Tax Ct. Memo LEXIS 68">*76 or complete default
of an effective exercise of this special power of
appointment, or in the event of the surviving spouse's
remarriage or cohabitation, then the remaining assets of
this trust shall be distributed in the same manner as
provided in
C. Trustee. The following persons or entities shall
serve as the trustee of this trust in the following order of
priority:
(1) Surviving spouse.
(2) * * * However, in the event that Vicki Ann Whiting
is the surviving spouse, her son, Charles Barry McKewen,
shall serve as successor trustee.
* * * * * * *
D. Administrative Provisions.
18,
this trust.
The trustee funded the marital deduction trust with various real estate properties and life insurance proceeds. The value of the assets in the marital deduction trust was $ 533,762 at the date of decedent's death.
2004 Tax Ct. Memo LEXIS 68">*77 3. Disability Section
Age Requirement or Disability. If any person has not
attained the age of thirty (30) years, or if any person who is,
in the Trustee's opinion, disabled because of advanced age,
illness or other cause when he or she becomes entitled to any
distribution pursuant to any trust created by this Trust
Agreement, then his or her separate share shall be held IN TRUST
for the uses and purposes and subject to the terms and
conditions hereinafter set forth:
A. Distribution of Income and Principal.
After the payment of all reasonable and necessary expenses
incurred in the management of the trust, the Trustee is
authorized to distribute to or apply for the benefit of
such beneficiary, so much of the net income and principal
of his or her separate share of the trust as in the
Trustee's absolute discretion deems appropriate. The
exercise of this power by the Trustee is within the
Trustee's2004 Tax Ct. Memo LEXIS 68">*78 sole discretion and the Trustee may accumulate
the annual net income of each beneficiary's separate share
of the trust to be added to such beneficiary's principal to
whatever extent and in whatever amounts that the Trustee
deems appropriate.
Prior to the termination of this trust, it is the
Grantor's desire but not the Grantor's direction, that the
income and principal of each separate share of this trust
so distributed or applied as provided above, be distributed
to or applied primarily for the health, education,
maintenance and support of each beneficiary. To this end,
it is the Grantor's desire that each beneficiary be
provided a standard of living which is similar to the
standard of living that is being enjoyed by their peers.
For the guidance of the Trustee, the Grantor directs
that all beneficiaries need not be treated the same; that
one or more of the beneficiaries may be wholly excluded
2004 Tax Ct. Memo LEXIS 68">*79 from any or all periodic distributions; and that the
pattern followed in one distribution need not be followed
in others.
B. Termination of Trust. When such beneficiary
has attained thirty (30) years of age, or upon his or her
death prior to attaining the age of thirty (30) years, or
if a disabled person when he or she, in my trustee's
opinion, becomes free of such disability, this trust shall
terminate as to his or her separate share, and the
remaining principal and accumulated income of his or her
separate share shall be distributed to such beneficiary, if
living, otherwise to his or her issue, per stirpes, or if
no issue, to his brothers and sisters, per stirpes.
Decedent and Mrs. Whiting are named the initial trustees under the disability section if a disability or incapacity occurs. If either of the trustees is unwilling to serve, and if the unwilling trustee fails to designate a successor trustee, then the successor trustee is first designated to be the surviving spouse. In2004 Tax Ct. Memo LEXIS 68">*80 the event that Mrs. Whiting survives decedent, her son, Charles Barry McKewen, is the next designated successor trustee.
4. Trustee's Powers Concerning Disabled
Beneficiaries
D. In making any payment to a minor or disabled
beneficiary, the Trustee may expend such payments for the
benefit of the beneficiary or make such payments directly to the
beneficiary, or to the beneficiary's parent, guardian, personal
representative or to the person with whom the beneficiary
resides, without having to look to the proper application of
those payments. This section does not limit the Trustee's powers
and must be construed to enable the Trustee to give each
beneficiary the fullest possible benefit and enjoyment of all of
the trust income and principal to which the beneficiary is
entitled.
5. State Law
Discussion
1. Marital Deduction
Pursuant to
The
(7) Election with respect to life estate for surviving
spouse. --
* * * * * * *
(B) * * * For purposes of this paragraph --
(i) In general. -- The term "qualified
terminable interest property" means property --
(I) which passes from the decedent,
(II) in which the surviving spouse has a
2004 Tax Ct. Memo LEXIS 68">*83 qualifying income interest for life, and
(III) to which an election under this
paragraph applies.
(ii) Qualifying income interest for life. -- The
surviving spouse has a qualifying income interest for
life if --
(I) the surviving spouse is entitled to all
the income from the property, payable annually or
at more frequent intervals, * * * and
(II) no person has a power to appoint any
part of the property to any person other than the
surviving spouse.
A QTIP interest is one in which a decedent passes to the surviving spouse a "qualifying income interest for life" and for which an election has been made.
A QTIP interest must meet the requirements of
2. Interpretation of a Trust Agreement
A determination of the nature of the interest that passes to the surviving spouse is made pursuant to the law of the jurisdiction under which the interest passes.
In
The cardinal rule in construing a trust instrument is that the
intention of the settlor must be ascertained.
(1972). In construing a trust, we apply the same rules
applicable to the construction of wills. See
The paramount principle in the interpretation of wills is
that the intention of the testator governs. In re Estate of
intention is to be determined from viewing the four corners of
the instrument, considering the language used, and giving
meaning to all of its provisions, whenever possible. Id.;
2004 Tax Ct. Memo LEXIS 68">*86 * * * The court should give force to each clause of the will,
and only when there is an irreconcilable conflict between two
clauses must one give way to the other. Estate of
B. Whether the Marital Deduction Trust Meets the Requirements
of
For the property in the marital deduction trust to be QTIP, it must be property: (1) which passes from the decedent; (2) in which the surviving spouse has a qualifying income interest for life; and (3) as to which an election has been made.
The issue is whether the terms of
1. Disability Section Is an Administrative Provision
Additionally, the estate argues that the disability section is merely a guardian substitute designation designed to avoid a costly court proceeding under Arkansas law to name a court- appointed guardian. That is, if the settlors of a trust fail to designate a guardian in case of their incapacity, Arkansas law provides for the naming of a guardian through a court proceeding. See
2. Terms Relating to Disability Section Create
Conflict
We find that the terms of the disability section conflict with the terms of the marital deduction trust. The provision of the disability section pertaining to the trustee's2004 Tax Ct. Memo LEXIS 68">*89 specific power to accumulate income conflicts with the terms contained in the marital deduction trust pertaining to distributions of income. The marital deduction trust provides that the trustee shall distribute at least annually the net income of the trust to or for the benefit of the surviving spouse.
Where terms in a trust conflict, Arkansas law provides: "In construing a * * * [trust] a court should give force to each provision thereof. It is only if there is an irreconcilable conflict between two clauses that one must give way to the other."
3. Decedent Intended To Qualify for the Marital
Deduction
In interpreting two conflicting clauses, we must determine the decedent's intent, using the four corners of the trust agreement. See
Decedent manifested his intent to qualify for the marital deduction in numerous ways. First, the trust agreement named two of the trusts in reference to the marital deduction: The "Marital Deduction Trust" and the "Non-Marital Deduction Trust". The name of a trust is evidence of decedent's intent.
Second, it is evident from the trust agreement2004 Tax Ct. Memo LEXIS 68">*91 that decedent intended to minimize Federal estate taxes through the use of the marital deduction. See
Third, the circumstances surrounding the drafting of the trust indicate that decedent intended to qualify for the marital deduction. Decedent knew that he was terminally ill and hired specialized tax attorneys to2004 Tax Ct. Memo LEXIS 68">*92 draft the trust: Two are Arkansas board recognized specialists in tax law, one is a certified public accountant, and two have a master of laws in taxation. The intent of the draftsman of the marital deduction trust was to create a trust which qualified for the marital deduction.
We note that
2004 Tax Ct. Memo LEXIS 68">*93 such right of my wife to call for the transfer or
conveyance to her of any part or parts or the whole of the
principal of said first share shall cease in the case of her
legal incapacity from any cause or upon the appointment of a
guardian, conservator, or other custodian of her person or
estate; and in the event of such legal incapacity, or
appointment of any guardian, conservator or other custodian of
her person or estate, my said wife or her guardian,
conservator or other custodian shall cease to have any
further right to the payment to her or such representative
of any specified sum or of any part of the income from said
first share, but my trustee shall thereupon and thereafter,
during her life, have full power and discretion to use and apply
such part of the net income of said first share for the benefit
of my said wife or may pay such part thereof at any time or from
time to time to her or to any such guardian, conservator or
other custodian of my wife's person or estate as he may deem in
his sole discretion to be wise and proper, and2004 Tax Ct. Memo LEXIS 68">*94 shall accumulate,
invest or reinvest any part of said net income not so paid or
applied by him as aforesaid and shall have power to add the same
to the principal of said first trust or thereafter to disburse
it to or for the benefit of my said wife, whether or not
previously so added to such principal. [Emphasis added.]
The Court held that the testator intentionally chose to "cut off" his wife's right to income should one of the stated contingencies occur.
Here,
In light of our holding that the trust qualifies for the marital deduction pursuant to
In reaching our holding herein, we have considered all arguments made by the parties, and to the extent not mentioned above, we find them to be irrelevant2004 Tax Ct. Memo LEXIS 68">*96 or without merit.
To reflect the foregoing,
Decision will be entered for petitioner.
1. All amounts are rounded to the nearest dollar.↩
2. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the date of decedent's death, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩
3. The parties stipulated that the estate's Federal estate tax return was late filed on Aug. 14, 1998, and that, to the extent that a Federal estate tax deficiency is finally determined, the failure-to-file addition to tax is applicable pursuant to
4.
In Re Estate of Conover , 304 Ark. 268 ( 1990 )
Aycock Pontiac, Inc. v. Aycock , 335 Ark. 456 ( 1998 )
T. Everett Starrett v. Commissioner of Internal Revenue , 223 F.2d 163 ( 1955 )
Matter of Estate of Lindsey , 309 Ark. 596 ( 1992 )
Murphy v. Morris , 200 Ark. 932 ( 1940 )
Union Trust Company v. Madigan , 183 Ark. 158 ( 1931 )
Tingley v. Commissioner , 22 T.C. 402 ( 1954 )