Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

Bandy v. Clancy

Court of Appeals of Maryland

August 24, 2016

MICHELLE BANDY et al.
v.
ALEXANDRA CLANCY

          Argued: June 1, 2016

         Orphans' Court for Baltimore City Estate No. 101962

          Barbera, C.J. Greene Adkins McDonald Watts Hotten Battaglia, Lynne A. (Retired, Specially Assigned), JJ.

          OPINION

          Battaglia, J.

         "The avoidance of taxes is the only intellectual pursuit that still carries any reward." - John Maynard Keynes

         "The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted."[1] - Justice George Sutherland

         Acclaimed author Thomas L. Clancy, Jr., ("Decedent" and "Testator") died in October of 2013, survived by his second wife, Alexandra M. Clancy ("Mrs. Clancy") and a minor child by that marriage, as well as four adult children ("The Older Children") from Mr. Clancy's first marriage. Mr. Clancy died, leaving a will, as well as various amendments; the issue before us involves the interpretation of Mr. Clancy's Will, as amended by a Second Codicil, with respect to not only the payment of federal estate taxes, but also to the question of upon which beneficiaries the burden of such taxes should be placed at the time of Mr. Clancy's death.[2]

         Federal estate taxes may be imposed on a decedent's real and personal property and any property interests[3] in excess of five million dollars, an amount adjusted annually since 2011 for the "cost of living", [4] 26 U.S.C. § 2010(c)(3); the threshold for the imposition of Federal estate taxes in 2015 was $5, 430, 000.[5] Federal estate tax is calculated on a graduated basis, on the value of the estate above the threshold, starting at 18% for the first ten thousand dollars.[6] Which beneficiaries, if any, are obligated to pay a portion or all of the federal estate taxes is a matter of State law, Riggs v. Del Drago et al., 317 U.S. 95, 97-98, 63 S.Ct. 109, 110, 87 L.Ed. 106, 110-11 (1942), and, in Maryland, may be provided for under the Will.[7] Md. Code Tax Gen. § 7-308(k).

         Deductions available to reduce the federal estate tax burden include expenses and indebtedness, [8] certain uncompensated losses, [9] transfers of property for public, charitable and religious uses[10] and the marital deduction, [11] all of which reduce the taxable estate by the value of the property allocated to the deduction.[12] With respect to the marital deduction, Congress in 1948 enacted a mechanism to reduce taxes on property transferred upon death to a surviving spouse. Revenue Act of 1948, Pub. L. No. 80-471, 62 Stat. 110, 117 (1948). At its inception, the marital deduction essentially excluded the lesser of the value of property transferred to the surviving spouse from the taxable estate or one half of the adjusted gross estate.[13] Changes to the computation of the marital deduction occurred over the years but the most significant for our purposes occurred in 1981 through the Economic Recovery Tax Act, under which the marital deduction was increased by enabling the total value of an estate to be transferred to a surviving spouse without adverse federal estate tax consequences. Economic Recovery Tax Act of 1981, Pub. L. 97-34, 95 Stat. 172 (1981). See also George M. Schain, Marital Trust v. QTIP: Advice for Estate Planners, 49 Mo. L. Rev. 741 (1984).

         Essentially, then, an estate can avoid adverse tax consequences upon the death of the testator through the use of the marital deduction, because the marital deduction "reflects a strongly held policy that it is inappropriate to assess transfer taxes on transfers of property between spouses." William M. McGovern, et al., Wills, Trusts and Estates Including Taxation and Future Interests 719 (4th ed. 2010). Federal estate taxes may be reduced when property is transferred to the surviving spouse upon the death of the decedent, but the value of the property conveyed that remains at the time of the death of the surviving spouse is subject to federal estate tax.[14] 26 U.S.C. § 2044. See also Angela M. Vallario, The Fundamentals of Estate Planning 251 (2012).

         To qualify for the marital deduction, the property must be that which would have been includable in the gross estate of the decedent and which passes, or has passed, to the surviving spouse by operation of law or otherwise.[15] 26 U.S.C. § 2056(a). "Terminable" property interests, interests given to a surviving spouse for a limited time, however, do not qualify for the marital deduction, unless the interest qualifies as one of the exceptions provided in Section 2056 of the Internal Revenue Code, [16] including the Qualified Terminable Interest Property (QTIP), 26 U.S.C. § 2056(b)(7), or that property:

(I)which passes from the decedent,
(II)in which the surviving spouse has a qualifying income interest for life, and
(III)to which an election[17] under this paragraph applies.

26 U.S.C. § 2056(b)(7)(B)(i). To constitute a "qualifying income interest for life" the terms of the property transfer must provide that:

         (I) the surviving spouse is entitled to all the income from the property, payable annually or at more frequent intervals, or has a usufruct[18] interest for life in the property, and

         (II)no person has a power to appoint any part of the property to any person other than the surviving spouse.

Subclause (II) shall not apply to a power exercisable only at or after the death of the surviving spouse. To the extent provided in regulations, an annuity shall be treated in a manner similar to an income interest in property (regardless of whether the property from which the annuity is payable can be separately identified).

26 U.S.C. § 2056(b)(7)(B)(ii). Treatment of property as QTIP property requires that the executor elect the property for treatment as QTIP property on the federal tax return for the estate, a decision that is irrevocable. 26 U.S.C. § 2056(b)(7)(B)(v).

         Property elected for QTIP treatment may qualify for the marital deduction, whether it is transferred outright or placed in a trust. Tax Reg. § 20.2056(a)-1. A properly structured QTIP trust, one that meets the requirements of Section 2056(b)(7)(B), qualifies the property in trust for inclusion in the marital deduction, yet allows the testator to specify a different beneficiary for the remainder of the QTIP trust assets upon the death of the surviving spouse. 26 U.S.C § 2056(b)(7)(B)(i)-(ii). See also Vallario, supra, at 261.The QTIP Trust qualifies for the marital deduction when the surviving spouse is entitled to all of the income of the trust for life, the income is paid to the surviving spouse at least annually and no one has the power to appoint any part of the property to any person other than the surviving spouse.

         In addition, unlike a traditional life estate, the surviving spouse, who is the beneficiary of a QTIP Trust, not only receives the income from the Trust but also may request that the trustee disburse principal from the Trust to meet the surviving spouse's needs.[19] Tax Reg. § 20.2056(b)-7(d)(6). It is possible, therefore, that distributions of principal for the benefit of the surviving spouse could have depleted the Trust such that only minimal assets are left for the remainderman identified by the testator.[20]

         Any property used to pay federal estate taxes, however, will not qualify for the marital deduction. 26 U.S.C. § 2056(b)(4)(A). If property allocated to the marital deduction is used to pay federal estate tax, the marital deduction is reduced by the amount of the payment made, thereby increasing the federal estate tax imposed on the estate. Id. See also Jerome A. Manning, Manning on Estate Planning 14-18 (7th ed. 2015).

         One way to protect the marital deduction from adverse tax consequences and receive the full federal estate tax benefit for property transferred to the surviving spouse is to use a "savings clause" in the will. That type of savings clause, often referred to as an "interpretive aide savings clause", restricts actions taken by the personal representative that could reduce the tax benefit of the marital deduction and assists with the interpretation and explanation of the testator's intent with respect to preventing adverse tax consequences. See Eugene Lyle Stoler, Savings Clauses, The CPA Journal, 25 (April 1999); Charles A. Redd, What Types of Savings Clauses will Preserve the Marital Deduction?, 14 Est. Plan. 72 (1987). The interpretive aide savings clause "attempts to elucidate the testator's or grantor's prevailing intentions with regard to securing the marital deduction, " Redd at 72, and is "a provision that takes away a power or changes a provision that is expressly given elsewhere in the instrument and is, therefore, in direct conflict with that other express power or provision." Stoler at 25; see also William Parsons, Lifetime and Testamentary Estate Planning, 74 (9th ed. 1983). The interpretive aide savings clause, therefore, can express the testator's intent that any authority granted to the personal representative is void should it reduce the efficacy of the marital deduction.

         The Internal Revenue Service has recognized the validity of an interpretive aide savings clause in Rev. Rul. 75-440 (1975). Addressed in Revenue Ruling 75-440 was a situation in which a will provided for both a marital trust and a residuary trust and granted authority to the trustees to invest trust principal in non-income producing life insurance. The will also included a savings clause that stated:

Notwithstanding anything herein contained to the contrary, any power, duty, or discretionary authority granted to my Fiduciary hereunder shall be absolutely void to the extent that either the right to exercise or the exercise thereof, shall in any way affect, jeopardize or cause my estate to lose all or any part of the tax benefit afforded my estate by the Marital Deduction under either Federal or State Laws.

Id. at 2. Since life insurance policies are not income producing property and often require that premiums be paid, a beneficiary of a marital trust that owned such property would not be entitled to all of the income, thereby eviscerating the marital deduction. Id. The trusts in question permitted such investment, and the question was whether that permission applied to the marital trust and, therefore, disqualified it from inclusion in the marital deduction. The Revenue Ruling concluded, however, that the interpretive aide savings clause in the will was helpful to interpret the testator's intent not to authorize the trustees to invest marital trust assets in non-income producing life insurance in order to qualify for the marital deduction:

The savings clause is not a savings clause in the strict sense of the term, but is an aid in determining the testator's intent; that is, the existence of a savings clause that would 'void' a disqualifying power given to the trustees of the marital deduction trust is relevant here only because it helps indicate the testator's intent not to give those trustees a disqualifying power.

Id. at 3. As a result, the marital deduction under Section 2056 was allowed with respect to the marital trust.[21]

         Mr. Clancy's Will, executed June 11, 2007, contained fourteen items that named his personal representative, instructed with respect to the payment of estate taxes, left Mr. Clancy's personal and real property to Mrs. Clancy and, with respect to the remainder of his estate, created three residuary trusts: a Marital Trust for the benefit of Mrs. Clancy representing one third of the residuary; a Family Trust for the benefit of Mrs. Clancy and their minor child equal to one half of the residue that remained after the creation of the Marital Trust; and the final, two Older Children's Trusts into which the remaining one half of the residue after the creation of the Marital Trust was to be deposited.[22]

         ITEM THIRD

A. All estate, inheritance, legacy, succession and transfer taxes (including any interest and any penalties thereon) lawfully payable with respect to all property includible in my gross estate or taxable in consequence of my death . . . shall be paid by my Personal Representative out of my residuary estate, subject, however, to the provisions hereinafter contained in Item SIXTH hereof with respect to the Marital Share therein created . . . .

         ITEM FOURTH

A. I give and bequeath to my Wife, if she survives me for thirty days, all of my tangible personal property of domestic or personal use.

         ITEM FIFTH

A.I give and devise to my Wife, if she survives me for thirty days, all of my right, title, and interest in and to my real property in Calvert County, Maryland, known as Peregrine Cliff, which includes my residence and all contiguous parcels of land, whether improved or unimproved, . . .
B.I give and devise to my Wife, if she survives me for thirty days, all of my right, title, and interest in and to my real property on Martha's Vineyard, Dukes County, Massachussetts . . .

         ITEM SIXTH

I give, bequeath, and devise all of the rest and residue of my estate, real and personal, and wheresoever situate (hereinafter referred to as my "residuary estate"), including all property over which I may have any power of appointment, as follows:
A. If my Wife survives me, there shall first be set apart and promptly transferred as set out below a separate fund (hereinafter sometimes referred to as the Marital Share) equal to one-third of my net estate, as calculated pursuant to Section 3-203(c) of the Estates and Trusts Article of the Annotated Code of Maryland.
1.. . .
2.No asset or proceeds of any asset shall be included in the Marital Share as to which a marital deduction would not be allowable if included.
3.The Marital Share shall not be charged with or reduced by any estate, inheritance, succession or other tax of any kind or nature assessed by any State or under the laws of the United States or by any other taxing authority whatsoever.
. . .
8. The Marital Share shall be paid over and transferred to and held by my trustee or trustees, hereinafter named and sometimes, for convenience, referred to in the singular neuter, as a separate trust, called the "Marital Trust, " which shall be administered as set out below in Item SEVENTH.
B. I direct that one-half of the remainder of my residuary estate shall be paid over and distributed to my trustee as a separate trust, called the "Non-Exempt Family Residuary Trust, " which shall be administered as set our below in Item EIGHTH.
C.I direct that the other one-half of the remainder of my residuary estate shall be administered as follows:
1.I direct that an amount equal to the applicable credit amount allowed to my Estate pursuant to Section 2010 of the Internal Revenue Code of 1986, as amended ("IRC"), shall be paid over and distributed to my trustee as a separate trust, called the "Exempt Residuary Trust, " which shall be administered as set out below in Item NINTH.
2.I direct that the balance of my residuary estate, after funding the Exempt Residuary Trust, shall be paid over and distributed to my trustee as a separate trust, called the "Non-Exempt Older Children's Residuary Trust, " which shall be administered as set out below in Item TENTH.
* * *

         ITEM EIGHTH

A.My trustee shall pay over the entire net income from the Non-Exempt Family Residuary Trust to my Wife, at least quarter-annually, during her lifetime.
B. Upon the exhaustion of the Marital Trust, my trustee shall have full power, in its discretion, to pay to or apply for the benefit of my Wife or my child or children by my Wife who are living from time to time, out of the principal of the Non-Exempt Family Residuary Trust, such amounts and in such proportions as my trustee, in its absolute discretion, from time to time may deem advisable and proper to provide for her or their continued maintenance, support, health, and education (including secondary, college, postgraduate, professional or other education).
C. In determining whether, when, and for whom any such payments pursuant to Paragraph B hereof shall be made, and the amounts thereof, if any, my trustee is hereby requested to take into consideration the respective needs and best interests of the beneficiaries without any duty or obligation with respect to my children to pay over equal amounts to or for all of them. Nevertheless, the decisions of my trustee shall be final and binding on all parties.
D.Upon the death of my Wife, or upon her remarriage, whichever event shall first occur, my trustee shall divide the then remainder of the Non-Exempt Family Residuary Trust, if any, together with all additions from the Marital Trust, both principal and undistributed net income, into a sufficient number of equal shares, if more than one, so that there shall be set apart one share for each of my children by my Wife who are then living and one such share for the descendants (as a group) of each of my children by my Wife who are not then living, but of whom there shall be one or more then living descendants.
. . .

         Mr. Clancy also included a "Savings Clause" in ITEM TWELVETH of his Will, directing that no "payment or distribution by my personal representative or trustee" should be made that would "in any way prevent my estate from receiving the benefit of the marital deduction":

         ITEM TWELVETH

D. Anything in this Will to the contrary notwithstanding, and whether or not any reference is made in any other provision of this Will to the limitations imposed by this Paragraph D, neither my personal representative nor my trustee shall have or exercise any authority, power, or discretion over the Marital Share, or the income thereof, or the property constituting the Marital Share, nor shall any payment or distribution by my personal representative or my trustee be limited or restricted by any provision of this Will that would in any way prevent my estate from receiving the benefit of the marital deduction as hereinbefore set forth.

         On September 18, 2007, Mr. Clancy executed a codicil ("First Codicil") that amended the Older Children's Trust to include the value of any gifts made to any of the Older Children during Mr. Clancy's lifetime.[23] Six years later, however, on July 25, 2013, Mr. Clancy executed a second codicil ("Second Codicil"), the subject of our review, which contained a series of amendments to the Family Trust as well as explicitly included the Family Trust in the "Savings Clause" designed to protect the benefit of the marital deduction.[24] The Second Codicil made the following amendments to ITEM EIGHTH:

. . . I amend Paragraph B of ITEM EIGHTH of my Will by deleting therefrom the words "or my child or children by my Wife who are living from time to time, " and the words "or their" and otherwise leaving said paragraph unchanged.
I amend Paragraph C of ITEM EIGHTH of my Will by deleting its text in its entirety and inserting in place thereof "[Intentionally omitted.]"
I amend Paragraph D of ITEM EIGHTH of my Will by deleting therefrom the words "or upon her remarriage, whichever event shall first occur, " and otherwise leaving said paragraph unchanged.

         Which resulted in the reading of ITEM EIGHTH as follows:

         ITEM EIGHTH

A. My trustee shall pay over the entire net income from the Non-Exempt Family Residuary Trust to my Wife, at least quarter-annually, during her lifetime.
B. Upon the exhaustion of the Marital Trust, my trustee shall have full power, in its discretion, to pay to or apply for the benefit of my Wife, out of the principal of the Non-Exempt Family Residuary Trust, such amounts and in such proportions as my trustee, in its absolute discretion, from time to time may deem advisable and proper to provide for her continued maintenance, support, health, and education (including secondary, college, postgraduate, professional or other education).
C.Intentionally omitted.
D.Upon the death of my Wife my trustee shall divide the then remainder of the Non-Exempt Family Residuary Trust, if any, together with all additions from the Marital Trust, both principal and undistributed net income, into a sufficient number of equal shares, if more than one, so that there shall be set apart one share for each of my children by my Wife who are then living and one such share for the descendants (as a group) of each of my children by my Wife who are not then living, but of whom there shall be one or more then living descendants.
. . .

         The Second Codicil also made additions to Paragraph D of Item Twelveth, deleting the former text in its entirety and replacing it with the following:

D. No asset or proceeds of any assets shall be included in the Marital Share or the Non-Exempt Family Residuary Trust as to which a marital deduction would not be allowed if included. Anything in this Will to the contrary notwithstanding, and whether or not any reference is made in any other provision of this Will to the limitations imposed by this Paragraph D, neither my personal representative nor my trustee shall have or exercise any authority, power or discretion over the Marital Share or the Non-Exempt Family Residuary Trust or the income thereof, or the property constituting the Marital Share or the Non-Exempt Family Residuary Trust, nor shall any payment or distribution by my personal representative or my trustee be limited or restricted by any provision of this Will, such that, in any such event, my estate would be prevented from receiving the benefit of the marital deduction as hereinbefore set forth. My Wife shall have the power at any time by written direction to compel my trustee to convert unproductive property held in the Marital Trust into income producing property. Likewise, my Wife shall have the power at any time by written direction to compel my trustee to convert unproductive property held in the Non-Exempt Family Residuary Trust into income producing property.

(emphasis added).

         After Mr. Clancy's death on October 1st, his Will was submitted along with the First and Second Codicils for probate in Baltimore City. In September of 2014, Mrs. Clancy petitioned in the Orphans' Court for a Declaratory Judgment in which she sought a determination that the Family Trust was not obligated to pay any estate taxes.[25] A hearing as to the construction and interpretation of the Will and ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.