DocketNumber: Docket No. 9971-92
Citation Numbers: 68 T.C.M. 1232, 1994 Tax Ct. Memo LEXIS 583, 1994 T.C. Memo. 573
Judges: JACOBS
Filed Date: 11/22/1994
Status: Non-Precedential
Modified Date: 11/20/2020
*583 Decision will be entered for petitioner.
MEMORANDUM FINDINGS OF FACT AND OPINION
JACOBS,
Section references are to the Internal Revenue Code in effect on the date of decedent's death.
FINDINGS OF FACT
Some of the facts have been stipulated and are found accordingly. The stipulation of facts and attached exhibits are incorporated herein by this reference.
Decedent died on December 20, 1987. At the time of her death, decedent resided in Mesa, Arizona. Decedent was survived by her husband, Samuel D. Flake, and their five children. Pursuant to decedent's last will and testament, Samuel D. Flake was appointed executor and personal representative of the estate. Decedent's estate timely filed a Federal estate tax return on *584 March 17, 1989.
Decedent and Samuel D. Flake established the Samuel D. and Rula B. Flake Trust pursuant to a Declaration and Agreement of Trust, effective December 26, 1983 (the 1983 trust). Decedent and Samuel D. Flake were the trustors, initial trustees, and first beneficiaries of the 1983 trust. Their five children were the second beneficiaries. The stated purpose of the 1983 trust is "to provide for the management and investment of the Trust Estate and provide for its distribution upon the death of the First Beneficiaries."
The 1983 trust instrument was drafted by LeRoy Anderson (Anderson). Anderson has been a certified public accountant in Arizona for almost 40 years; he also attended 2-1/2 years of law school. Anderson has known decedent and Samuel D. Flake since 1951, and has been involved in their business, tax, and estate planning matters since 1953.
In drafting the 1983 trust instrument, Anderson used a basic form that he acquired from an attorney, and modified it to meet the needs and wishes of the trustors. The relevant language of the 1983 trust instrument provides:
1. The Trustees shall pay to the*585 First Beneficiaries [Samuel D. Flake and Rula B. Flake, as joint tenants with rights of survivorship] the net income of the Trust Estate in convenient installments as long as they shall live. The Trustees shall also, upon the request of the First Beneficiaries, pay such amount or amounts of the principal of the Trust Estate to the First Beneficiaries as they shall, from time to time, request in writing from the Trustees, until their death or until the Trust Estate is exhausted, whichever first occurs. 2. During the life-time of the First Beneficiaries, the income or principal shall be distributable only to them, and not to [the] second beneficiaries.
Upon the death of one of the First Beneficiaries, the following shall govern: 1. The one-half interest in the Trust Estate of the deceased beneficiary shall pass to the surviving beneficiary in the best method possible under the estate tax law then in effect. * * * 5. Notwithstanding anything herein to the contrary, particularly in paragraph 1. of this Article III above, should the Surviving First Beneficiary not live longer than nine months after the Decedent*586 First Beneficiary, then paragraph 1. shall not govern and the Trust Estate shall be divided into an "A" - Survivor's Trust, and "B" - Decedent's Trust, and the Survivor First Beneficiary shall have a life interest only in the Decedent's Trust. The Trusts shall be administered separately, but all other provisions shall remain. The Trust Estate need not be divided.
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1. No significance is to be attached to the use of singular or plural designations or the use of the masculine, feminine or neuter gender in this agreement.
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1. Trustors may revoke this trust agreement in whole or in part and amend this trust agreement from time to time by written instrument signed and delivered to Trustees during Trustors' lifetime, provided that the duties, liabilities and compensation of Trustees shall not be materially changed without their written consent. The Trust Estate, or the part thereof affected by such revocation, including accrued or collected but undistributed income, shall thereupon be distributed to the Trustors or shall be retained, maintained or handled in accordance with*587 their directions. No amendments or revocations shall become effective until written notice is delivered to Trustees with the exceptions that property may be added to the trust corpus without any delay or notice rquirements. During any period of incompetency and from and after the death of both Trustors, this trust agreement shall be unamendable and shall be irrevocable.
Decedent and Samuel D. Flake established a second trust, called the S & R Trust, pursuant to a Declaration and Agreement of Trust effective July 1, 1987 (the 1987 trust). Decedent and Samuel D. Flake were the trustors, initial trustees, and first beneficiaries of the 1987 trust. Their five children were the second beneficiaries. The stated purpose of the 1987 trust is "to provide for the management and investment of the Trust Estate for the benefit of the first beneficiaries and provide for its distribution upon the death of the First Beneficiaries."
The 1987 trust instrument was also drafted by Anderson. As with the 1983 trust, Anderson used a basic form that he acquired from an attorney, and modified it to meet the needs and wishes of the trustors. The relevant language of the 1987 trust instrument provides:
*588
A. Trustors may revoke this trust agreement in whole or in part and amend this trust agreement from time to time by written instrument signed and delivered to Trustee during Trustors' lifetime, provided that the duties, liabilities and compensation of Trustees shall not be materially changed without their written consent. The Trust Estate, or the part thereof affected by such revocation, including accrued or collected but undistributed income, shall thereupon be distributed to the Trustors or in accordance with their directions. No amendments or revocations shall become effective until written notice is delivered to Trustees with the exception that property may be added to the trust corpus without any delay or notice requirement. During any period of incompetency and from and after the death of both Trustors, this trust agreement shall be unamendable and shall be irrevocable.
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A. 1. The Trustees shall pay to the First Beneficiaries [Samuel D. Flake and Rula B. Flake] the net income of the Trust Estate in convenient installments*589 at least annually as long as they shall live. The Trustees shall also, upon the request of the First Beneficiaries, pay such amount or amounts of the principal of the Trust Estate to the First Beneficiaries as they shall, from time to time, request in writing from the Trustees, until their death or until the Trust Estate is exhausted, whichever first occurs.
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B. 1. Upon the death of one of the First Beneficiaries, the Trust Estate shall be divided into an "A" - Survivor's Trust and a "B" - Decedent's Trust, and the Decedent's community property interest in the trust shall be transferred to the Decedent's Trust. If the portion transferred to the Decedent's Trust is greater than the maximum amount allowed tax free under the Internal Revenue Code for Estate Tax purposes, the excess over the tax free amount shall be divided to a "C" Decedent's Trust as Qualified Terminable Interest property for which election can be made for the purposes of qualifying for the marital deduction allowed under said law. The Trusts may continue to be administered as one trust, but must be accounted for separately. * * * 4. It is the intent*590 of Trustors that this trust shall be administered for the primary benefit of the surviving spouse. Trustee shall liberally exercise such discretion as will benefit the surviving spouse and shall consider the interest of successive or remainder beneficiaries to be subsidiary to the interest of the surviving spouse.
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* * * B. No significance is to be attached to the use of singular or plural designations or the use of the masculine, feminine or neuter gender in this agreement. Each designation or gender shall be construed to include others where appropriate.
Petitioner's Federal estate tax return values decedent's gross estate at $ 2,505,110. Of this amount, decedent's beneficial interest in the 1983 trust is valued at $ 2,169,645, and decedent's beneficial interest in the 1987 trust is valued at $ 326,296. The estate claimed a marital deduction in the amount of $ 1,882,835, which respondent disallowed.
On August 24, 1991, Samuel D. Flake signed documents revoking both the 1983 and 1987 trusts.
OPINION
We must herein decide whether decedent's interests in both the 1983 and 1987 trusts that passed to her husband upon her*591 death qualify for the marital deduction under
In determining the value of a taxable estate for Federal estate tax purposes,
*592 In order for the exception to the terminable interest rule to be operative, five conditions must be satisfied. First, the surviving spouse must be entitled for life to all the net income from the interest; second, the income must be paid to the surviving spouse annually or at more frequent intervals; third, the surviving spouse must have the power to appoint the interest to himself or his estate; fourth, the power to appoint must be excercisable by the surviving spouse alone and in all events; and, fifth, no person other than the surviving spouse may have the power to appoint the interest to any person other than the surviving spouse.
With respect to the power of appointment needed to qualify for the The term "power or appointment" includes all powers which are in substance and effect powers of appointment regardless of the nomenclature used in creating the power and regardless of local property*593 law connotations. For example, if a trust instrument provides that the beneficiary may appropriate or consume the principal of the trust, The conditions * * * that the surviving spouse must have a power of appointment exercisable in favor of herself or her estate and exercisable alone and in all events, are not met unless the power of the surviving spouse to appoint the entire interest or a specific portion of it falls within one of the following categories: (i) A power so to appoint fully exercisable in her own favor at any time following the decedent's death (as, for example,
It is settled law that the surviving spouse's power to demand distribution of the trust corpus qualifies as a power of appointment entitled to the marital*594 deduction.
The pertinent language involved is contained in Articles II and VI of the 1983 trust instrument and Articles V and VIII of the 1987 trust instrument. Article II of the 1983 trust instrument and Article V of the 1987 trust instrument provide for the principal and net income of each trust to pass to Samuel*595 D. Flake and Rula B. Flake "until their death or until the Trust Estate is exhausted, whichever first occurs". Article VI of the 1983 trust instrument and Article VIII of the 1987 trust instrument provide that "no significance is to be attached to the use of singular or plural designations". Resolution of the issue before us, thus, turns on whether "their death" means the death of
Federal law determines what interests in property are to be taxed; however, local law determines the nature of the interests passing under a trust or will. Here, the law of Arizona, where decedent was domiciled at the time of her death, controls. See
Under Arizona law, when a trust is created pursuant to a written instrument, the grantor's intent is ascertained from the express language of *596 the instrument, and a court is not to go outside the instrument in an attempt to give effect to what it conceives to be the grantor's actual intent or motive.
In the instant situation, we find nothing in the language of either trust instrument or in the circumstances surrounding either trust instrument's execution that convinces us that the grantors (decedent and Samuel D. Flake) intended the principal of the trusts to remain intact. Rather, we find the opposite. Our reading of the trust instruments convinces us that the grantors' overall intent was to permit the survivor to invade the principal or revoke the trusts. In this regard, we are mindful that Article VIII of the 1983 trust instrument and Article IV of the 1987 trust instrument both provide that "from and after the
Here, *598 the surviving spouse had the power to demand that the trustee invade or consume any or all of the trust corpora at any time prior to the surviving spouse's death, without any duty to account to the remaindermen. And in such event, the amounts withdrawn would, if possessed by the surviving spouse at his death, constitute a part of his estate free of any claims of the remaindermen.
Respondent argues that the interests passing to Samuel D. Flake do not qualify for the marital deduction because of a failure to satisfy the requirements of property interest passing to a decedent's surviving spouse is deductible * * * even though it is a terminable interest, and even though an interest therein passed from the decedent to another person, if it is a terminable interest only because * * * It is a right to income for life with a general power of appointment, meeting the requirements set forth in § 20.2056(b)-5; * * *. [Sec. 20.2056(b)-1(d), Estate Tax Regs.]
We are mindful that Article III, paragraph 5, of the 1983 trust instrument states: "
To conclude, construing these trust instruments under Arizona law, giving full effect to all the language used therein and the circumstances attending the execution of the trust agreements that might have a bearing thereon, we hold that decedent's interests in both the 1983 trust and the 1987 trust that passed to her husband upon her death qualify for the marital deduction.
To reflect the foregoing,
1. (A) the interest or such portion thereof so passing shall, for purposes of subsection (a), be considered as passing to the surviving spouse, and (B) no part of the interest so passing shall, for purposes of paragraph (1)(A), be considered as passing to any person other than the surviving spouse. This paragraph shall apply only if such power in the surviving spouse to appoint the entire interest, or such specific portion thereof, whether exercisable by will or during life, is exercisable by such spouse alone and in all events.↩