By Charles A. Redd Sonnenschein Nath & Rosenthal, St. Louis, MO
Tax-Motivated Constructions
In In the Matter of Asserson, 184 Misc.2d 480, 707 N.Y.S.2d 821 (Surr. Ct. 2000), a settlor created two identical irrevocable trusts, one for each of the settlor’s two infant grandchildren. A series of gifts were made to each of the trusts. Under the trusts’ dispositive provisions, the trustee of each trust was directed to accumulate and add to principal each year the income of each trust until its respective beneficiary reached age 21. Each beneficiary, upon reaching age 21, was to receive, outright, all property the composing his or her trust. If the beneficiary were to die before reaching age 21, the remaining trust property, if any, was to be distributed to the beneficiary’s estate. In addition, the trustee of each trust was permitted, in lieu of making direct payments of expenses for a beneficiary, to make payments to her guardian.
The settlor had claimed gift tax annual exclusions with respect to gifts made to the trusts. In the estate tax audit which ensued following the settlor’s death, the Internal Revenue Service took the position that the gifts to the trusts did not qualify for the gift tax annual exclusion because the dispositive provisions of the trusts did not comport with the mandate of IRC Sec. 2503(c)(1), which requires that income and principal be available to be expended by, or for the benefit of, the beneficiaries during the time they were under age 21.
Despite governing instrument language which, standing alone, clearly directs the trustee to accumulate income and add it to principal so long as the beneficiary is under age 21, the Surrogate’s Court construed the trust instruments to authorize distributions of income and principal to or on behalf of the trust beneficiaries prior to their reaching age 21. In so doing, the Court sought to engage in "a sympathetic reading of the instruments as a whole" and implied that the predominant intention of the settlor in creating and funding the trusts was to utilize the gift tax annual exclusion. In support of its conclusion, the Court noted that, in the governing instrument provision addressing disposition of the remaining trust property if the beneficiary were to die before reaching age 21, the reference to principal and accumulated income, "if any," implied that both income and principal could have been exhausted before the beneficiary reached age 21. The Court also pointed to the governing instrument language which authorized payments from the trust to the beneficiary’s guardian in lieu of making direct payments to the beneficiary. The Court reasoned that, since a guardian for a minor beneficiary is in office only during the period in which the beneficiary is under age 21, it may be implied that such language had no purpose if the settlor did not intend that the beneficiary be entitled to receive discretionary distributions while under age 21.
The case of Fleet National Bank v. Mackey, 433 Mass. 1009 (2001), involves construction of a trust instrument by the Supreme Judicial Court of Massachusetts for the purpose of securing certain tax benefits. The plaintiffs in the trial court sought a declaration that a non-marital trust, Trust B, (which apparently contained assets having an aggregate value exceeding $1 million), could be divided into two separate subtrusts with identical dispositive provisions in order to take maximum advantage of the decedent’s $1 million GST exemption. The plaintiffs represented to the trial court that one of the newly created subtrusts would be entirely exempt from generation-skipping transfer tax because all of the decedent’s GST exemption would be allocated to it. The plaintiffs further represented that any distributions to skip persons would be made from the exempt subtrust, and distributions to non-skip persons could be made from the other subtrust. The plaintiffs further represented that neither the dispositive provisions of the underlying trust instrument nor the interest of any beneficiary would be affected by the proposed division of Trust B.
The Supreme Judicial Court entered an Order construing the Will to authorize the proposed division notwithstanding that there was no language in the Will expressly authorizing the division. The Court was persuaded that the Will should be construed to authorize the division because the Will indicated the decedent’s "tax consciousness." The Court was satisfied that the decedent did not intend his Will and Trust B to operate in a manner that would enrich the taxing authorities.
Hillman v. Hillman, 2001 Mass. LEXIS 175, is another example of a generous decision by the Supreme Judicial Court of Massachusetts construing an estate planning document in a manner to obtain tax benefits. The plaintiff’s mother created an irrevocable trust in 1970 and conferred upon him a power of appointment exercisable by a written instrument during his life or by Will. The permissible appointees included the son’s spouse, his issue, his mother’s issue or the spouses of any of his issue or his mother’s issue.
Since the son was a member of the class of permissible appointees (because he was one of his mother’s issue), the son apparently could exercise his power of appointment in favor of himself. The Court briefly described the adverse estate tax and income tax consequences that could result if the son’s power of appointment were considered a power that he could exercise in his own favor.
The Supreme Judicial Court concluded that the mother, by conferring on her son a power to appoint trust property in favor of her issue, did not intend to empower her son to appoint to himself or his estate. Noting that it has tended to disfavor interpretations that would resolve ambiguities by attributing an intention that would benefit taxing authorities and no one else, the Court offered three specific reasons for construing the term "my issue" not to include the son. First, the pattern of language established in the trust instrument was that, whenever the mother made reference to her son, she referred to him as "my said son," and so it would be incongruous to infer that she intended to include him under the general, nonspecific phrase "my issue." Second, if the words "my issue" were construed to include the son, other language identifying objects of the power would be rendered redundant and confusing. For example, if the phrase "my issue" were intended by the mother to include her son and his issue, the reference to "my said son’s issue" would become superfluous. Third, reading the power of appointment language to confer a taxable general power of appointment on the son appeared inconsistent with other provisions in the trust instrument that restrict the son’s access to trust principal in an apparent effort to cause the son’s power of appointment not to be general for tax purposes.
No-Contest Clauses
In Badouh v. Hale, 22 S.W.3d 392 (Tex. 2000), Rubylien Barbara Badouh died in 1996 survived by her daughter, Elaine, and her son, Edward. Four years before Rubylien’s death, Edward obtained a judgment against Elaine in the approximate amount of $150,000. By her Will, Rubylien devised her home to Elaine. After Rubylien’s Will was filed for probate, Edward applied for a turnover order to satisfy his judgment against Elaine’s interest in the estate. Elaine responded by disclaiming her entire interest in the estate and by asserting, in a motion for summary judgment, that Edward, by seeking turnover relief against Elaine, violated the Will’s no-contest clause, which stated that, if Edward "directly or indirectly challenges or contests this Will or any of its provisions, or attempts in any way to oppose or set aside the probate of this Will or impair or invalidate any of its provisions," the provisions made in the Will for Edward were to be revoked.
The Supreme Court of Texas, after articulating the general rule that no-contest clauses are strictly construed, held that Edward’s seeking turnover relief against Elaine did not violate the Will’s no-contest provision. The Court pointed out that breach of a no-contest clause occurs only when the act asserted to trigger the clause come within the clause’s express terms. The Court noted that, in applying for a turnover order, Edward was not opposing the Will or attempting to invalidate any of its provisions. Indeed, as the Court correctly observed, Edward’s seeking the turnover order should be understood as supportive of the Will’s dispositive provisions because obtaining a turnover order against Elaine would have been a useless exercise were Elaine not a beneficiary under the Will.
It seems clear that the Court reached the correct result in this case. It would appear that Elaine’s assertion that Edward, by seeking turnover relief, violated the no-contest clause was little more than a desperate act of retribution in response to Edward’s seeking the turnover order and then taking the position (with which the Court agreed) that Elaine’s disclaimer was ineffective.
The case of In the Matter of the Estate of Frances Cagney, 720 N.Y.S.2d 759 (Surr. Ct. 2001), involved the estate of the surviving spouse of the actor Jimmy Cagney. Mr. Cagney died in 1986 and left a Will which was contested by his two grandchildren, Casey and Jonathan, through a guardian ad litem. The Will contest was settled, and, under the settlement agreement, the guardian ad litem for Casey and Jonathan agreed, among other things, to relinquish Casey’s and Jonathan’s rights to contest the Will of their grandmother, Frances Cagney, at her subsequent death.
Frances died in 1994 leaving a Will under which Casey and Jonathan were each to receive $25,000. Frances’ Will also contained a broad "in terrorem" clause essentially providing that any beneficiary who attempted to contest or oppose the probate or validity of the Will or who commenced or prosecuted any legal proceeding of any kind to set aside or nullify the Will would forfeit his or her beneficial interests under the Will.
In the proceeding in which Frances’ Will was presented for probate, Casey and Jonathan engaged in "pre-objection discovery" by taking testimony from one of the Will’s attesting witnesses. The executors designated under the Will filed a motion requesting the granting of letters testamentary and stated in their motion that Casey and Jonathan had, by entering into the settlement agreement, relinquished any right they might otherwise have had to contest Frances’ Will. Casey and Jonathan opposed the executors’ motion in the Surrogate’s Court and in the Appellate Division and then sought, unsuccessfully, leave to appeal to the Court of Appeals. The executors then filed a motion for summary judgment in the Surrogate’s Court asserting that the in terrorem clause in Frances’ Will was activated when Casey and Jonathan engaged in pre-objection discovery and the ensuing litigation.
The Surrogate’s Court held that Casey and Jonathan’s action triggered the in terrorem clause and caused them to forfeit their bequests under their grandmother’s Will. The Court pointed out that Casey and Jonathan’s conduct, in engaging in material and protracted litigation concerning whether they could file objections to the probate of their grandmother’s Will, far exceeded what is permitted by New York law allowing pre-objection discovery. The Court seemed particularly incensed that Casey and Jonathan believed they had the latitude to engage in any type of litigation at all involving their grandmother’s Will in light of the settlement agreement to which they were parties.
The litigation carried on by Casey and Jonathan in response to the executors’ motion for the issuance of letters testamentary seems clearly and unambiguously prohibited by the language of Frances’ in terrorem clause. Nevertheless, the executors’ motion seeking sanctions against Casey and Jonathan was, for reasons not entirely persuasive, denied. The legal relevance of the fact that Casey and Jonathan entered into the settlement agreement is not entirely clear.
Fee Language
The case entitled In the Matter of the Estate of Blaicher, 23 S.W.3d 811 (Mo.App. E.D. 2000), involved a dispute regarding the meaning of language in a decedent’s Will authorizing the payment of fees to the personal representative and the lawyer assisting in the administration of the estate. The subject language was as follows:
My personal representative shall engage the professional services of XXX to assist in the administration of my estate. I further direct that my personal representative shall not be bound by any fee schedules for his reimbursement or the reimbursement of my attorney, and they charge such reasonable amounts as may be proper in the judgment of my personal representative.
The inventory and appraisement filed in the Probate Division reflected that the estate had a value of $1,515,800. A certified public accountant was retained to prepare the estate tax returns. The personal representative determined that his fee for serving as personal representative would be $151,800 and that the fee to the lawyer for assisting in the administration of the estate would be another $151,800. Thus, the personal representative’s fee and the attorney’s fee were each 10 percent of the value of the gross estate.
The beneficiaries objected to the amounts of the fees. The personal representative and the lawyer then filed suit seeking construction of the Will, asking that the Court determine that the language authorizing the payment of fees to the personal representative and the lawyer conferred sole discretion on the personal representative in determining the amount of such fees.
The Court of Appeals rejected the position of the personal representative and the lawyer. The Court determined that the personal representative and the lawyer were entitled under the Will only to charge "reasonable" fees and that the reasonableness of fees is a matter as to which the courts possess expert knowledge. Observing that the administration of an uncomplicated seven-figure estate is considered a prime piece of legal business both for the personal representative and for the lawyer and that the statutory fee for each (in this case $37,059.00) is usually considered to be highly remunerative, the Court held that, despite testamentary language apparently allowing the personal representative to determine whether the amounts of fees paid to the personal representative and the lawyer were reasonable, the personal representative’s exercise of discretion was subject to judicial review.
Tax Clause
Bunting v. Bunting, 60 Conn. App. 665, 768 2d 989 (Conn. 2000), involved the interpretation of a testamentary tax clause and the application of state law involving apportionment of estate taxes. The decedent, before death, gave to his son all of the outstanding stock of a closely-held business. This transaction eroded a meaningful portion of the decedent’s unified credit at the time of the gift but did not result in any current gift tax liability. In the estate tax proceedings following the decedent’s death, the gift of stock, when added to the value of the decedent’s gross estate, caused the estate to be subject to an aggregate amount of federal and state estate taxes larger than the value of the assets composing the gross estate. The Will provided that estate, succession, inheritance, death or transfer taxes were to be paid out of the estate as an expense of administration, without apportionment or contribution.
The plaintiffs in the trial court, the residuary beneficiaries under the decedent’s Will, asserted that the executor (who was the son who received the inter vivos gift of closely-held business stock) should have sought recovery from himself, in his individual capacity, of the amount of estate taxes attributable to inclusion of the inter vivos closely-held business stock gift as an adjusted taxable gift. The executor countered that the tax clause clearly and unambiguously placed the burden of all transfer taxes on the estate and that he therefore had no obligation, in his individual capacity, to reimburse the estate for any estate taxes paid out of the estate.
The Connecticut Appellate Court, observing that Connecticut’s standards allow great latitude in deciding the admissibility of evidence, held that extrinsic evidence could be considered as to the decedent’s intent concerning the payment of death taxes, even though the Court, in a previous portion of its opinion, had concluded that the language of the tax clause on its face was not ambiguous. By reviewing "prior and subsequent events," the Court discerned a latent ambiguity in the tax clause. Among the extrinsic evidence received and considered was testimony of the lawyer who drafted the Will. The lawyer testified that the decedent did not anticipate that any gift tax would be due as a result of the making of the inter vivos gift to the son.
Although the Court concluded that the tax clause was sufficient to negate equitable apportionment, under Connecticut law, of estate taxes attributable to amounts passing as a result of the decedent’s death, the Court opined that the decedent could not have intended the tax clause to apply to estate taxes attributable to the inter vivos gift since he believed that gift was not taxable. Accordingly, under Connecticut estate tax apportionment law, the Court ordered that the estate tax attributable to the gift be allocated against the donee.
A strong dissent argued that, because the language of the tax clause was clear and ambiguous, no extrinsic evidence should have been admitted to determine the decedent’s intent. The dissent postulated that, because the majority concluded there was a latent ambiguity only after considering extrinsic evidence, the majority opinion "puts the cart before the horse."