Estate of Carpenter v. C.I.R.

• Decision Date: 09 May 1995
• Docket Number: No. 94-2176,94-2176
• Citation: 52 F.3d 1266
• Parties: -2084, 95-1 USTC P 60,194 ESTATE OF Stanley M. CARPENTER, Deceased; William R. Thomas, Administrator, Petitioners-Appellants, v. COMMISSIONER OF THE INTERNAL REVENUE SERVICE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 1266

52 F.3d 1266

75 A.F.T.R.2d 95-2084, 95-1 USTC P 60,194

ESTATE OF Stanley M. CARPENTER, Deceased; William R Thomas, Administrator, Petitioners-Appellants, v. COMMISSIONER OF THE INTERNAL REVENUE SERVICE, Respondent-Appellee.

No. 94-2176.

United States Court of Appeals, Fourth Circuit.

Argued March 9, 1995.

Decided May 9, 1995.

ARGUED: Addison Vann Irvin, Brown & Bunch, Chapel Hill, NC, for appellants. David Alan Shuster, Tax Div., U.S. Dept. of Justice, Washington, DC, for appellee. ON BRIEF: Loretta C. Argrett, Asst. Atty. Gen., Gary R. Allen, David I. Pincus, Tax Div., U.S. Dept. of Justice, Washington, DC, for appellee.

Before WIDENER, MICHAEL and MOTZ, Circuit Judges.

Affirmed by published opinion. Judge MOTZ wrote the opinion, in which Judge WIDENER and Judge MICHAEL joined.

OPINION

MOTZ, Circuit Judge:

This appeal involves the widowed beneficiary of a trust created pursuant to her husband's will, who accepted certain funds as part of a settlement agreement after a dispute arose over the terms of the trust. The tax court found that because the widow's interest under the trust was a life estate unaccompanied by a general power of appointment, the decedent's estate was not entitled to a marital deduction for funds paid to the widow as part of the settlement. We affirm.

I.

Stanley M. Carpenter, a resident of North Carolina, died on October 2, 1987. He was survived by his wife, Ernestine Carpenter, who was 63 years old at his death, and his daughter by a previous marriage, Nancy Carpenter Reid, who was 50 at his death. Ernestine's son from a prior marriage, William R. Thomas, was subsequently appointed as the administrator of Stanley's estate. Several years prior to his death, on May 5, 1981, Stanley executed a holographic will. He also executed a codicil to his will on December 17, 1986. The validity of these documents is uncontested.

Under the terms of the will, Stanley left to his daughter, Nancy, $50,000 in cash and three parcels of real property. Stanley Carpenter devised to Ernestine his "personal cars, trucks, tractors, mowers, farm equipment, guns and everything I own at the farm." The will further provided that certain real property from the estate was to be placed in trust for the benefit of Ernestine as follows 3.

I hereby wish to have all my real estate including my farm, ¹ a lot in Beaufort, land in Orange, Durham and Granville Counties to be put in Trust for my wife Ernestine.

My wife is to select the Trust Dept. She is also to take an equal part as an executor with the Trust in all decisions regarding this trust [sic].

This Trust is to work with my wife + to give her all money necessary to give her a good life and happiness.

I chose to use a Trust so that no one can dominate or take advantage of her for her entire life.

I want the Trust together with my wife to sell the land in Granville County and Orange County after 5 years of my death and not later than 10 years to the highest bidder or to work with a developer to obtain the best returns.

I love my wife dearly and she has given me the happiest years of my life and I am concerned that people may try to influence her if she should be depressed or ill.

The Trust working with my wife may sell any property at anytime if necessary for cash for the Trust in case my wife wants cash for her personal health, needs, trips or anything relating to my wife.

My wife may live at the farm for her life if she chooses and the Trust is to keep up and pay all expenses neccary [sic] including Taxes, insurance, etc. I hope she will eventually leave the farm and enjoy life while she lives and not try to save money to be left behind.

I have worked hard all my life and deprived myself of trips, clothes, new tractor, etc. in order that she could have a good life and I don't want her to to [sic] deprive herself of anything in order to save for some one [sic] else after the hard life I have had trying to prevent my relatives from stealing my share of income from Carpenter's, Inc., a firm of which I was one of the original incorporators and helped to build up.

As stated this Trust is to protect my wife only. I hope she will use it wisely for her happiness.

4.

If my wife should decide to move from the farm and same is sold to the highest bidder, the proceeds are to go into the Trust Fund and after 2 years 1/2 (one half) of proceeds from the sale are to be given to my wife personally.

5.

If the Trust cannot accept the terms of this will, my wife is to select another company or my wife may change from one Trust to another.

The trust created by Stanley Carpenter's will further provided that any remaining trust assets upon Ernestine Carpenter's death should be transferred to Nancy Reid:

Since I am leaving practically all of my life's assets for my wife's benefit while she lives, I think and want anything left in the Trust to go to my daughter Nancy.

Since my wife has valuable stocks and accounts of her own that she has accumulated in her life, I feel no obligation to leave anything to my wife's son, who lives good and better than I ever had a chance to do at his age.

* * * * * *

Only my wife and daughter are to benefit from my life's work.

The will contained no residuary clause and, as a result, Stanley died intestate with respect to his remaining assets unidentified in the will.

As administrator of Stanley Carpenter's estate, William Thomas retained legal counsel on behalf of the Estate. Upon examining the will, the Estate's counsel became concerned that a possible conflict might arise between Ernestine Carpenter and Nancy Reid concerning their respective rights under the will. Counsel submitted copies of the will to two North Carolina banks in the hope that one of them would be able to serve as trustee according to the will's terms. Neither bank was willing to act as trustee unless the rights of Ernestine Carpenter and Nancy Reid under the will were clarified--either through a settlement agreement between the two or through a declaratory judgment action.

On January 25, 1988, the Estate's counsel wrote a letter advising Ernestine and Nancy of the potential conflict and the banks' refusal to act as trustee under the existing terms of the trust. He further opined that:

Conceivably, Mrs. Carpenter could use the entire principal of the trust for her personal uses. Therefore, it would appear that the percentage of the trust assets which should go to Mrs. Carpenter outright would be somewhere between 70% and 100% of the total trust assets in order to correspond to her interest in the trust set up by Mr. Carpenter.

If the trust is left in place, Mrs. Carpenter will be able to draw freely upon all the assets in the trust for her needs without limitation. She will not, however, be able to give or devise any of that property to anyone else.

Mrs. Reid will be entitled to whatever remains of the trust at Mrs. Carpenter's death, subject to her right to withdraw. The amount that Mrs. Reid would eventually receive would, of course, depend entirely on how much longer Mrs. Carpenter lives and how much she elects to spend. Also, if the trust is set up, I understand that there will be the normal administrative costs, plus extra hourly charges that will be necessary because so much of the trust property is real estate.

If the trust is not set up and the assets are distributed outright, Mrs. Carpenter will take only a portion of the trust assets rather than have access to all of the trust assets for the rest of her life. Mrs. Reid would receive a portion of the trust assets outright now. The amount of this portion may be less or more than what Mrs. Reid would eventually receive upon Mrs. Carpenter's death. Some costs, of course, would be necessary to settle the matter in this manner, but a much larger amount of ongoing administrative costs for the trust would be saved.

Nancy Reid, whose husband is an attorney, did not accept the Estate counsel's assessment that Ernestine Carpenter's share was equal to between "70% and 100% of the total trust assets." Apparently after some negotiation, on May 20, 1988, Ernestine and Nancy executed a Family Settlement Agreement, which was thereafter filed in, and approved by, the General Court of Justice, Superior Court Division, Durham County, North Carolina. Pursuant to the agreement, Ernestine and Nancy waived their respective rights under the terms of the trust. Instead, they agreed that all of the property designated in the will as trust assets, and all remaining property not mentioned in the will, should be divided equally between the two of them as tenants in common. In order to demonstrate that a good faith dispute had arisen as to the proper interpretation of Stanley Carpenter's testamentary trust, the agreement provided:

AND WHEREAS, said holographic will is vague and indefinite and a Declaratory Judgment action would be necessary to interpret said will in order to clarify the status of legal title to much of the property of said estate at great expense to the estate, and a genuine dispute has arisen between the Wife and Daughter as to the true intent of Stanley Manning Carpenter with respect to the selection of a trustee or trustees as set forth in Item 3 of said Last Will and Testament and with respect to the property to be left in trust, to wit: whether the Wife may sell the property comprising the corpus of the proposed trust for her support without reference to a standard of support, or whether said property may be sold for payment of the Wife's necessities of life only.

On November 25, 1988, William Thomas filed the federal estate tax return in his capacity as administrator. The return included a claim that the estate was entitled to a marital deduction ² in the amount of $464,795, the purported value of Ernestine Carpenter's share of the property divided between Ernestine Carpenter and Nancy Reid pursuant to the terms of the Family Settlement Agreement. The Commissioner of the Internal Revenue Service...