Northern Trust Co. v. Comm'r of Internal Revenue (In re Estate of Smith)

Citation66 T.C. 415
Decision Date09 June 1976
Docket NumberDocket No. 9463-74.
PartiesESTATE OF CHARLES W. SMITH, DECEASED, THE NORTHERN TRUST COMPANY, TRUSTEE, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

I. John Snider II and Frederic A. Sytsma, for the petitioner.

James C. Lynch, for the respondent.

Decedent created an inter vivos trust comprised of most of his estate, reserving the income to himself for life. Upon his death the trust estate was to be divided into a marital portion and a residual portion. The marital portion was to be determined by the trustee as directed in an ‘equalization clause’ that was designed to produce the lowest aggregate estate taxes on the estates of decedent and his surviving spouse by use of the appropriate marital deduction for his estate. The surviving spouse was given the income for life from the marital portion and a general power to appoint the marital portion of the trust at her death. Held, the value of the interest in property which passed to the surviving spouse under the provisions of the trust qualifies for the marital deduction under secs. 2056(a) and 2056(b)(5), I.R.C. 1954.

OPINION

DRENNEN, Judge:

Respondent determined a deficiency in the estate tax of the Estate of Charles W. Smith in the amount of $646,700.50. This deficiency resulted from a disallowance of $1,330,010.62 of a claimed marital deduction of $1,521,245.86. The propriety of that disallowance is at issue herein.

The sole question for our determination is whether a property interest which passed from the decedent to his surviving spouse pursuant to the terms of a trust instrument which contained a so-called marital deduction ‘equalization clause’ qualified under section 2056, I.R.C. 1954,1 for the marital deduction.

All of the facts have been stipulated and those facts together with material facts ascertained from the stipulated exhibits are found accordingly and are hereafter summarized.

Decedent Charles W. Smith died on June 7, 1970, a resident of North Muskegon, Mich. Prior to his death, by agreement dated August 2, 1967, by and between himself and the Northern Trust Co. of Chicago, Ill., decedent established the Charles W. Smith Trust (hereafter sometimes referred to as the trust or inter vivos trust), a revocable trust with income payable to decedent for life, into which decedent transferred a substantial portion of his assets.2 The Northern Trust Co., hereinafter referred to as petitioner, as trustee of said trust, timely filed a Federal estate tax return on behalf of the estate with the District Director, Detroit, Mich. In said return petitioner reported a gross estate, valued at the date of decedent's death, in the amount of $3,492,764.32.3 Of this amount $3,288,516.99 represented the value of assets held in the aforementioned inter vivos trust.4 The remainder of the reported gross estate ($204,247.33) consisted of (1) proceeds of an insurance policy on decedent's life (payable to Charles W. Smith Trust); (2) property held jointly with decedent's surviving spouse; (3) property given to surviving spouse in contemplation of death; and (4) a small amount of personal property bequeathed to decedent's surviving spouse. There were no probate proceedings with respect to decedent's estate.5

Article IV of the inter vivos trust, entitled ‘Distribution,‘ provided that all the net income of the trust should be paid to the settlor or at his direction during his lifetime; at the settlor's death the corpus of said trust was to be divided into two portions, the ‘marital portion’ and the ‘residual portion.’

ARTICLE IV

DISTRIBUTION

ON SETTLOR'S DEATH— Upon the death of Settlor, if his wife, ALICE M. SMITH, survives him, corpus (including additions, but excluding property added to or allocated to a separate asset account by reason of having been added by one other than Settlor, or for any other reason) shall be divided into two portions, one of which shall be called the Marital Portion and the other of which shall be called the Residual Portion.

(a) There shall first be allocated to the Residual Portion any asset or the proceeds of any asset (or interest therein) with respect to which the marital deduction would not be allowed if allocated to the Marital Portion.

(b) There shall than be allocated to the Marital Portion that percentage interest in the balance of the assets constituting the trust estate which shall when taken together with all other interests and property that qualify for the marital deduction and that pass or shall have passed to Settlor's said wife under other provisions of this trust or otherwise, obtain for Settlor's estate a marital deduction which would result in the lowest Federal estate taxes in Settlor's estate and Settlor's wife's estate, on the assumption Settlor's wife died after him, but on the date of his death and that her estate were valued as of the date on (and in the manner in) which Settlor's estate is valued for Federal estate tax purposes; Settlor's purpose is to equalize, insofar as possible, his estate and her estate for Federal estate tax purposes, based upon said assumptions.

(c) There shall finally be allocated to the Residual Portion the remaining percentage interest in the balance of the assets constituting Settlor's estate.

(d) The percentage interest of the Marital and Residual Portions shall be determined and fixed by using asset values for all such purposes as finally established for Federal estate tax purposes. In selecting a valuation date for the purpose of the Federal estate tax, Settlor directs Trustee to select the date which will result in the greatest tax benefit to Settlor's wife's and Settlor's estates, regardless of the effect this selection may have on the amount provided by this Article for Settlor's wife.

Settlor also authorizes Trustee to make such elections as it shall deem proper including (without limitation intended) the election as to whether certain expenses shall be taken as deductions against estate tax or income tax, regardless of the effect on the pattern of allocation.

The fixed percentage of Settlor's estate allocated to each portion shall, for distribution purposes, be applied to the assets distributed valued at their fair market value at the time of distribution.

(e) The Marital Portion shall be held as hereinafter provided in the section of this Article entitled ‘Marital Trust’.

(f) The Residual Portion shall be held as hereinafter provided in the section of this Article entitled ‘Residual Trust’.

MARITAL TRUST

All property allocated to the Marital Portion shall be held, administered and distributed as follows:

INCOME: All of the net income shall be paid to Settlor's wife for her life.

CORPUS: Settlor's wife may appoint the corpus as she may indicate by deed; provided, however, that this power of appointment is a ‘special power’ as hereinafter defined.

Upon the death of Settlor's wife, Trustee shall pay over the corpus as Settlor's said wife may appoint by her last will; provided, however, that this power of appointment is a ‘general power’ as hereinafter defined;6 in default of the exercise of such general power of appointment by Settlor's wife or insofar as such appointment shall be void or shall not take effect, then upon the death of Settlor's wife, the corpus shall be distributed as if Settlor had died on the date of his wife's death, but surviving her, under the provisions of the Section of this Article entitled ‘Residual Trust’ except that paragraphs (a), (b) and (c) shall be disregarded.

RESIDUAL TRUST

Trustee shall pay all debts, fees, expenses, taxes and other charges against Settlor's estate which it deems to be proper; provided, nothing herein shall be construed to permit application of the Marital Portion to the discharge of such charges, it being Settlor's intent that all such charges be paid from this Residual Trust.

Decedent's wife, Alice M. Smith (hereafter sometimes referred to as Alice or surviving spouse), survived him and died on August 2, 1971.

The estate tax return filed by petitioner claimed a marital deduction, under section 2056, in an amount of $1,521,245.86. This amount represented the value of the ‘marital trust’ determined by petitioner in accordance with the aforementioned trust provisions, plus $191,144.24 representing the value of property interests passing to decedent's spouse outside of the trust. The calculation of the amount allocated to the marital trust was made as follows: Petitioner determined that had Charles W. Smith's wife, Alice M. Smith, died after him but on the date of his death, her individual gross estate, including any and all assets received from her husband other than the ‘marital portion’ of the Charles W. Smith Trust, would have had a total value of $667,331.47 as valued on the date of his death, June 7, 1970. The value of Alice M. Smith's individual gross estate as determined by the petitioner in this assumed-fact situation would have been $813,630.17 one year from the date of death, the applicable ‘alternate valuation date.'7 The component parts of the foregoing totals are:

Petitioner determined that on June 7, 1971, the applicable alternate valuation date, the values of both Charles W. Smith's estate and Alice M. Smith's individual gross ‘estate’ were higher than the date of death values. Consequently, in accordance with the terms of the inter vivos trust instrument petitioner made a determination on June 16, 1971, to utilize date-of-death values for Federal estate tax purposes, including computation of the dollar value of the ‘marital portion’ of the Charles W. Smith Trust.

The dollar value of the ‘marital portion’ of the Charles W. Smith Trust was determined to be $1,330,101.62:

+----------------------------------------+
                ¦Computation of marital trust            ¦
                +----------------------------------------¦
                ¦                         ¦¦             ¦
                +-------------------------++-------------¦
                ¦Total gross estate       ¦¦$3,492,764.32¦
...

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7 cases
  • Clayton v. Comm'r of Internal Revenue (In re Estate of Clayton)
    • United States
    • United States Tax Court
    • September 16, 1991
    ...estate the marital deduction. Petitioner relies on Estate of Smith v. Commissioner, 565 F.2d 455 (7th Cir. 1977), affg. per curiam 66 T.C. 415 (1976), wherein the Court of Appeals for the Seventh Circuit explained the purpose of the terminable interest rule of section 2056(b)(1) and stated:......
  • Stockland v. Comm'r of Internal Revenue (In re Estate of Robertson), Docket No. 39144-87.
    • United States
    • United States Tax Court
    • June 29, 1992
    ...the surviving spouse's income interest could terminate or fail. Finally, we will address petitioner's reliance upon Estate of Smith v. Commissioner, 66 T.C. 415 (1976), affd. 565 F.2d 455 (7th Cir. 1977), to support its position. That case involves an analysis of section 2056(b)(5) property......
  • Estate of Smith
    • United States
    • United States Courts of Appeals. United States Court of Appeals (7th Circuit)
    • November 3, 1977
    ...clause did not create a terminable interest problem requiring the disallowance of the marital deduction under Section 2056(b)(1). 66 T.C. 415 (1976). Consequently, based on the Commissioner's final computations, taxpayer was awarded $2,907.25 as its estate tax overpayment (App. 45a). We The......
  • Estate of Wilson v. Commissioner
    • United States
    • United States Tax Court
    • August 24, 1992
    ...Rept. 1013, 80th Cong., 2d Sess. (Part 2) 16 (1948), 1948-1 C.B. 331, 342; emphasis added.] As we stated in Estate of Smith v. Commissioner [Dec. 33,862], 66 T.C. 415, 424 (1976), affd. [77-2 USTC ¶ 13,215] 565 F.2d 455 (7th Cir. 1977): "The rationale of this is clear; by virtue of a power ......
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