121 T.C. 54 (T.C. 2003), 4668-02, Estate of Engelman v. Commissioner of Internal Revenue
|Citation:||121 T.C. 54, 121 T.C. No. 4|
|Opinion Judge:||WHERRY, Judge:|
|Party Name:||ESTATE OF LEONA ENGELMAN, DECEASED, PEGGY D. MATTSON, EXECUTOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent|
|Attorney:||Richard V. Vermazen, for petitioner. Christine V. Olsen, for respondent.|
|Judge Panel:||Wherry, Robert A., Jr.|
|Case Date:||July 24, 2003|
|Court:||United States Tax Court|
Estate was not entitled to charitable deductions for amounts distributed to beneficiaries named in Trust B of Engelman Living Trust.
In 1990, H and D, husband and wife, established a living trust. The terms of the trust provided for an allocation of trust assets between two separate trusts, Trust A and Trust B, upon the death of the first spouse. Initially, all assets were to be placed in Trust A except to the extent disclaimed by the surviving spouse. Disclaimed assets were to be placed in Trust B. The surviving spouse was also granted a power of appointment effective at death over Trust A. H died on Dec. 30, 1997. On Feb. 5, 1998, D executed a document entitled " Power of Appointment" directing disposition of the Trust A corpus. D died on Mar. 6, 1998.
Thereafter, on May 11, 1998, the special administrator of her estate executed a " Disclaimer" of D's interest in Trust A assets valued at approximately $ 600,000 as of H's earlier death. Those assets were placed in Trust B and distributed to the beneficiaries thereof.
Held: Trust assets worth approximately $ 617,317 at D's date of death are includable in the gross estate on account of absence of a disclaimer qualified within the meaning of sec. 2518, I.R.C. Held, further, no charitable deduction is allowable with respect to distributions to the American Cancer Society, Yale University School of Law, or the State of Israel.
Respondent determined a Federal estate tax deficiency of $ 356,211 for the Estate of Leona Engelman (the estate). After concessions, the issues for decision are:
(1) Whether a qualified disclaimer within the meaning of section 2518 was made with respect to trust assets worth approximately $ 617,317 at the date of death of Leona Engelman (decedent); and
(2) whether, to the extent that the foregoing trust assets are included in the gross estate, the estate is entitled to a charitable deduction for certain amounts distributed.
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.
This case was submitted fully stipulated pursuant to Rule 122, and the facts are so found. The stipulations of the parties, with accompanying exhibits, are incorporated herein by this reference. Decedent was a resident of California when she died testate in that State on March 6, 1998. No probate proceeding was maintained on behalf of the estate. The executor and special administrator of decedent's estate, Peggy D. Mattson (Ms. Mattson), resided in California at the time the petition in this case was filed.
Decedent and Samuel Engelman (Mr. Engelman) were husband and wife. On January 10, 1990, in California, they executed a declaration of trust placing their assets into the Engelman Living Trust. The instrument named the settlors, decedent and Mr. Engelman, as the initial trustees of the trust and set forth provisions regarding administration and disposition of the trust estate.
The trust declaration provided generally that, while both settlors were alive, the trustees were to distribute income or principal as the settlors directed. Upon the death of the first spouse, the following provisions were to take effect:
2. DEATH OF FIRST SETTLOR. Upon the death of one of the SETTLORS, survived by the other, the TRUSTEES shall divide the Trust Estate into two separate trusts. These separate trusts will be referred to
as: TRUST " A" and TRUST " B".
Although it is intended that two separate trusts be created under the laws of California for federal and state income tax purposes, the TRUSTEES may hold all of the Trust Estate as one common fund, and are not required to make a physical division thereof.
3. DIVISION AND ALLOCATION OF ASSETS. The Trust Estate, and distributions received by this Trust from the estate of the deceased SETTLOR (if any), shall be allocated among the trusts described above as follows:
A. Except as provided in Subparagraph B and Paragraph 4 [relating to simultaneous death], the entire Trust Estate shall be allocated to TRUST " A."
B. If the surviving SETTLOR, in his or her capacity as beneficiary, effectively disclaims (under Code Section 2518 or any successor provision then in effect) all, or any specific portion, of his or her interest in TRUST " A", such disclaimed amount shall be allocated to TRUST " B" to be held, administered and distributed according to its provisions.
With respect to Trust A, all income was to be paid to or for the benefit of the surviving settlor; the surviving settlor could direct the trustees to distribute principal at any time and for any reason; and the surviving settlor was granted a power, at his or her death, to appoint any part of the principal and undistributed income of Trust A. The latter power was to " be made by last written instrument filed with the TRUSTEES, effective at the surviving SETTLOR's death and specifically referring to this power of appointment." Any portion of Trust A not so appointed was to be added to Trust B.
As regards Trust B, net income was to be paid to the surviving settlor at least annually, and the trustees were authorized to distribute principal as they determined necessary or advisable for the settlor's health, education, support or maintenance (after exhaustion of Trust A). Upon the death of the surviving settlor, the balance of Trust B (excluding household goods and personal effects) was to be distributed pursuant to an enumerated list of specific bequests, with the residue to the State of Israel. Decedent and Mr. Engelman also on January 10, 1990, signed substantially identical pourover wills devising and bequeathing their estates to the trustees of the Engelman Living Trust.
Decedent and Mr. Engelman amended the trust instrument on December 14, 1990, May 6, 1992, and December 28, 1994. The first two amendments revised the list of specific beneficiaries to receive assets from Trust B, and the third amendment provided further information regarding
successor trustees. According to the second amendment, specific bequests from Trust B were to be made as follows: To Helen Adams, $ 50,000; to Carol L. Engelman, $ 30,000; to Jerrold W. Engelman, $ 10,000; to Alan Engelman, $ 10,000; to the American Cancer Society, $ 5,000; and to the Yale University School of Law, $ 5,000.
On December 30, 1997, Mr. Engelman died, survived by decedent. At that time, the total value of assets in the Engelman Living Trust was approximately $ 1,546,487. Subsequently, on February 5, 1998, decedent executed a document entitled " POWER OF APPOINTMENT" . The preamble recited: " The undersigned at present is the holder of a power of appointment over the principal of Trust A or the Survivor's Trust, which came into existence as the result of the passing of her husband, pursuant to that certain revocable Declaration of Trust executed by SAMUEL ENGELMAN and LEONA ENGELMAN on January 10, 1990." Thereafter, the instrument directed that the Trust A corpus remain in trust for the benefit of Helen Adams and then upon her death be distributed 10 percent each to the American Cancer Society, the University of California at San Diego, the City of Hope, and Sharon Commings, with the residue to Jeffrey McCoy. The power of appointment was delivered to the trustees of the Engelman Living Trust.
Decedent died on March 6, 1998. On May 11, 1998, Ms. Mattson, in her capacity as special administrator of decedent's estate, executed a document entitled " DISCLAIMER OF INTEREST IN TRUST PROPERTY" . Language therein stated that Ms. Mattson, on behalf of decedent, " absolutely disclaims and renounces" all interest in assets listed on an attached schedule. The referenced schedule set forth Trust A assets valued at approximately $ 600,000 as of Mr. Engelman's date of death. The document further specified that " such disclaimed assets shall constitute Trust 'B' as per the express provisions" of the Engelman Living Trust.
Ms. Mattson, as successor trustee of the Engelman Living Trust, then distributed from Trust A to Trust B property worth approximately $ 617,317, representing the appreciated value of the disclaimed assets on the date of the distribution. After this allocation, property valued at approximately $ 930,557 as of decedent's date of death remained in Trust A. On July 2, 1998, checks written on the account of " Engelman
Living Trust B" were issued to the following beneficiaries: To the Estate of Helen Adams, $ 50,000; to Carol L. Engelman, $ 30,000; to Jerrold W. Engelman, $ 10,000; to Alan Engelman, $ 10,000; to Yale University, $ 5,000; and to the American Cancer Society, $ 5,000. In August of 1998, a transmittal letter referencing " the balance of the B Trust portion of the Engelman Trust" and a check in the amount of $ 432,901.41 were sent to the State of Israel.
Thereafter, in December of 1998, a Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, was filed on behalf of decedent's estate. The reported value of the gross estate, $ 936,476 as of the alternate valuation date, excluded the disclaimed assets. The return claimed a charitable deduction of $ 285,777, comprising $ 95,259 each to the American Cancer Society, the University of California at San Diego, and the City of Hope. The Form...
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