Bennett v. Comm'r of Internal Revenue (In re Estate of Bennett)
| Decision Date | 01 February 1993 |
| Docket Number | No. 8052–89.,8052–89. |
| Parties | ESTATE OF Charles Russell BENNETT, Deceased.Eva F. BENNETT and Don R. Paxson, Co–Executors, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Lester G. Fant III and John Wester, for petitioner.
Judy Jacobs Miller and Chalmers W. Poston, Jr., for respondent.
Respondent determined a deficiency in petitioner's Federal estate tax of $2,716,879 and an addition to tax of $80,415.1 The issue for decision is whether any portion of the Charles Russell Bennett Memorial Trust constitutes a “qualifying income interest for life” and hence qualifies for the marital deduction under section 2056(b)(7).
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the date of the decedent's death, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Some of the facts have been stipulated and are so found. The stipulations of facts and accompanying exhibits are incorporated herein by this reference.
Charles Russell Bennett (the decedent) was a citizen of the United States and a domiciliary of the State of Kansas when he died testate on August 27, 1985. Eva F. Bennett (Mrs. Bennett) is the surviving spouse of the decedent. She and Donald R. Paxson are the co-executors of the Estate of Charles Russell Bennett (the Estate or petitioner). At the time of filing of the petition, the co-executors were both residents and domiciliaries of the State of Kansas. At all relevant times, the Estate has been administered in the District Court for Shawnee County, Kansas, Probate Division.
In his will, dated June 6, 1984, the decedent made several specific bequests to Mrs. Bennett and others. The Charles R. and Eva F. Bennett Trust (the Trust) was the residual beneficiary under the decedent's will.
The Trust was an inter vivos trust created by an agreement dated June 6, 1984 (the Trust Agreement). The trustees named in the Trust Agreement were Charles Russell Bennett, Eva F. Bennett, Donald R. Paxson, Randolph G. Austin, and Gary Hale. Section 14 of the Trust Agreement provided for the appointment of successor trustees in the event of the death, incapacity, or resignation of one or more of the five named trustees. The Trust was funded originally with 10,000 shares of Bennett Housing, Inc. stock, with a par value of $1 per share. The income of the Trust was payable to the decedent during his lifetime. Upon his death, the Trust was bifurcated into two separate trusts: the Charles Russell Bennett Family Trust (the Family Trust) and the Charles Russell Bennett Memorial Trust (the Memorial Trust). As of September 1985, the trustees of the Family Trust and the Memorial Trust were Mrs. Bennett, Donald R. Paxson, Randolph G. Austin, Gary Hale, and Doris Cole (the Trustees).
The co-executors of the Estate timely filed a Form 706, United States Estate Tax Return, with the Internal Revenue Service Center in Austin, Texas. They claimed marital deductions under sections 2056(b)(5) and (7) for the Memorial Trust. It has now been conceded that the Estate is not entitled to a marital deduction under section 2056(b)(5).
The decedent's Last Will and Testament (the will) is silent in regard to any marital deduction.2 Paragraph 7 of the will, the Residuary Bequest, reads as follows:
7. RESIDUARY BEQUEST. My wife, Eva F. Bennett and I have established the CHARLES R. AND EVA F. BENNETT TRUST under that certain Trust Agreement dated June 6, 1984. All the rest, residue, and remainder of my estate, both real and personal, of whatever kind or character and wheresoever situated, I give and bequeath to Eva F. Bennett, Gary Hale, Randolph Gordon Austin and Don R. Paxson as Trustees under that certain Trust Agreement dated June 6, 1984. I specifically direct and provide that the property received by virtue of this bequest shall be held by said Trustees, to be administered by them in accordance with the provisions thereof, as a[n] addition to the trust fund, and said Trustees shall dispose of said property as a part of said Trust in accordance with the provisions thereof.
Under the terms of the Trust Agreement, the income of the Trust was to be paid to the decedent during his life. Upon his death the Trust was bifurcated into two separate trusts, the Family Trust and the Memorial Trust. The Family Trust received the largest amount that could pass free of Federal estate tax by reason of the unified credit and the state death tax credit. The Trustees are required to pay the net income of the Family Trust to Mrs. Bennett during her lifetime; they also have the discretion to pay Mrs. Bennett the principal. If the income of the Family Trust exceeds her needs, the excess income may be paid to the remainder beneficiaries of the Family Trust. The four remainder beneficiaries of the Family Trust are Christine Bennett Anderson (the decedent's granddaughter), Mark Radcliff (the decedent's grandson), Melvin Kent Radcliff (the decedent's grandson), and Randolph Gordon Austin (the decedent's grandnephew).
Upon the death of Mrs. Bennett, or upon her failure to survive the decedent, the income of the Family Trust is payable to LaVera Radcliff (Ms. Radcliff), the decedent's daughter of his previous marriage. The Trustees also have the power to invade the principal of the Family Trust for the benefit of Ms. Radcliff. If the income of the Family Trust exceeds Ms. Radcliff's needs, the excess income may be paid to the remainder beneficiaries. If both Mrs. Bennett and Ms. Radcliff die before the termination of the Family Trust, the income is payable to the four remainder beneficiaries.
The Family Trust is to terminate 20 years after the death of the decedent. However, if either Mrs. Bennett or Ms. Radcliff survives the decedent by more than 20 years, then the Family Trust is to terminate upon the death of Mrs. Bennett or Ms. Radcliff, whoever dies last. Upon termination of the Family Trust, the assets of the trust estate are to be distributed to the remainder beneficiaries. The Estate does not claim a marital deduction in regard to the Family Trust.
The Memorial Trust received the trust estate that remained after the funding of the Family Trust. The Trustees are to pay the net income of the Memorial Trust to Mrs. Bennett during her lifetime.
Upon the death of Mrs. Bennett, a portion of the Memorial Trust will be splintered into the Eva F. Bennett Family Trust. The amount to be placed in the Eva F. Bennett Family Trust is the lesser of: (1) $600,000; (2) 10 percent of the value of the Memorial Trust at the date of Mrs. Bennett's death; or (3) the largest amount that can pass free of Federal estate tax by reason of the unified credit and the state death tax credit. Mrs. Bennett has the power to appoint the income and the beneficiaries of her Family Trust. The nonsplintered portion of the Memorial Trust will remain intact, and the income will be paid to the income beneficiaries of the Family Trust (i.e., first Ms. Radcliff, then the four remainder beneficiaries).
Both the Eva F. Bennett Family Trust and the Memorial Trust are to continue until the termination date of the Family Trust; that is, 20 years after the decedent's death, or, if Ms. Radcliff survives the decedent by more than 20 years, upon her death. Upon the termination of the Memorial Trust, the remainder will be divided into two portions and distributed. The first portion, containing 50 percent of the value of the Memorial Trust at the date of Mrs. Bennett's death, minus all amounts set aside for the Eva F. Bennett Family Trust, shall be distributed to the persons appointed in Mrs. Bennett's will. The second portion, consisting of the remainder of the Memorial Trust's assets (including those amounts not specifically appointed to other persons by the will of Mrs. Bennett), shall be distributed to the four remainder beneficiaries of the Family Trust (i.e., the decedent's three grandchildren and a grandnephew).
The third paragraph of the Trust Agreement provides that, should the Trustees determine that Marquerite Laden (the decedent's niece), Katherine Bliss (the decedent's sister), or Norma Jean McCoubrey (the decedent's niece) is in need of funds, additional to each woman's then sources of income, to provide for the payment of medical care, hospitalization, or the cost of illnesses or accidents other than those of a routine nature, then the Trustees are authorized to pay such costs out of the Memorial Trust. The Trustees are also authorized, in their sole discretion, to pay expenses of the last illness, funeral, and burial of the same three persons out of the Memorial Trust. Paragraph 3 of the Trust Agreement, in its entirety, reads as follows:
3. PROVISION FOR MEDICAL CARE, HOSPITALIZATION AND FUNERAL EXPENSES FOR CERTAIN PERSONS. Should the Trustees at any time or from time to time determine that one or more of the persons named in this paragraph 3 is in need of funds additional to their then sources of income to provide for payment of medical care, hospitalization or the cost of illnesses or accidents other than those of a routine nature, then the Trustees are authorized to pay such costs to or on behalf of the named persons. The Trustees are authorized in their sole discretion to pay expenses of the last illness, funeral and burial of any of the persons named in this paragraph.
(a) The persons eligible for the benefits of this provision are: Marguerite [sic] Laden, Katherine Bliss and Norma Jean McCoubrey.
(b) The Trustees are authorized to make such payments from either the income or principal of the Charles R. Bennett Memorial Trust.
Paragraph 2(b)(2)(ii) of the Trust Agreement provides that the Trustees are authorized to pay such medical, funeral, and burial benefits for those three individuals from either the net income or the principal of the Memorial Trust. The Trust...
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