Estate of Carpenter v. Commissioner
| Decision Date | 17 March 1994 |
| Docket Number | Docket No. 13227-91. |
| Citation | 67 T.C.M. 2400 |
| Parties | Estate of Stanley M. Carpenter, Deceased, William R. Thomas, Administrator v. Commissioner. |
| Court | U.S. Tax Court |
A. Vann Irvin and M. LeAnn Nease, 2741 University Dr., Durham, N.C., for the petitioner. Ross A. Rowley, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined a deficiency in petitioner's Federal estate tax in the amount of $135,250. After concessions, the sole issue to be decided is whether petitioner is entitled to a marital deduction under section 2056 with respect to certain property which under decedent's will was to be placed in trust for the benefit of the surviving spouse during her lifetime, but was instead transferred outright by petitioner to the surviving spouse pursuant to an agreement entered into by the surviving spouse and the other beneficiary under the trust. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect at the date of decedent's death, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Some of the facts and certain documents have been stipulated for trial pursuant to Rule 91 and are found accordingly. We incorporate the parties' stipulations in this Opinion by reference, irrespective of any restatement below.
Petitioner is the Estate of Stanley M. Carpenter, William R. Thomas, Administrator. William R. Thomas is the duly appointed administrator of the Estate of Stanley M. Carpenter. At the time petitioner's petition was filed, William R. Thomas resided in Bahama, North Carolina.
On October 2, 1987, Stanley M. Carpenter (decedent) died. Decedent was survived by his spouse Ernestine Carpenter and his daughter Nancy Carpenter Reid. Ernestine Carpenter was decedent's fourth wife. Nancy Carpenter Reid was decedent's only child and was the daughter of decedent and decedent's first wife.
Sometime prior to her marriage with decedent, Ernestine Carpenter had been previously married. William R. Thomas (the Estate's administrator) is the son of Ernestine Carpenter and her prior husband.
Decedent completed college and attended one year of law school, but had not finished his law school education. Many years prior to decedent's death, he and other members of his family had started Carpenter's, Inc., one of the first General Motors car dealerships in North Carolina and the country. At the time of his death, decedent owned shares of stock in Carpenter's, Inc., but was engaged in a dispute with certain of the other shareholders over the dealership's operation and decedent's share of its profits. Decedent also owned various real properties and other assets.
Decedent's last will consisted of a holographic will which he executed on May 5, 1981, and a codicil which he executed on December 17, 1986. In his last will, decedent left to his daughter Nancy Carpenter Reid $50,000 cash, two undeveloped beach lots, and a house and lot. He left to his wife Ernestine Carpenter all of his "personal cars, trucks, tractors, mowers, farm equipment, guns and everything I own at the farm." Decedent's will further provided that certain other specified assets were to be placed in a trust for the benefit of his wife.
Prior to their amendment by the codicil executed on December 17, 1986, the will provisions concerning the trust were as follows:
3.
I hereby wish to have all my real estate including my farm, 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.
* * *
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 five 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 best 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 necessary including Taxes, insurance, etc. I hope that 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 deprive herself of anything in order to save for some one 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 that 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 two 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.
6.
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.
* * *
8.
When Carpenter's stock I own is sold I want same to go into the Trust after the provisions of Item 2 [concerning the specific bequests of cash and real property to decedent's daughter] are met if same cannot be met at my death.
Any proceeds from the litigation are to go into the Trust also.
In the codicil executed on December 17, 1986, decedent amended his prior will so that his farm would be left to his wife outright rather than being placed in the trust. The other provisions of the will remained unchanged.
Decedent's last will contained no residuary clause and failed to provide for the disposition of various other assets which decedent owned at his death. As a result, decedent died intestate as to such property.
Following decedent's death on October 2, 1987, decedent's surviving spouse Ernestine Carpenter and his daughter Nancy Carpenter Reid were apprised of the provisions of decedent's will. Initially, neither Mrs. Carpenter nor Mrs. Reid desired to serve as the administrator of decedent's estate. Mrs. Carpenter's son, William R. Thomas, offered to serve as the administrator.
Mr. Thomas is a policeman and had prior experience administering the estate of another relative of his. Mrs. Reid's husband, Marland Reid, is an attorney. Mr. Reid offered to have a paralegal at his law firm who performed estate work assist Mr. Thomas. Mrs. Carpenter and Mrs. Reid agreed to have Mr. Thomas appointed as the administrator of decedent's estate.
Subsequently, Mr. Thomas consulted with and retained A. Vann Irvin, petitioner's counsel in the instant case, in connection with the administration of the estate. Upon examining decedent's will, Mr. Irvin became concerned with how the will provisions establishing the trust should be interpreted. He believed that a potential conflict of interest might exist between decedent's wife, Ernestine Carpenter, as the life beneficiary and the daughter, Nancy Carpenter Reid, as the remainderman, because the will provided no specific instructions as to how the trust's income and principal should be divided and appeared to provide little limitation on the wife's power to have the property sold and the sales proceeds expended for her own personal purposes.
Mr. Irvin provided copies of the will to two individuals he was acquainted with, each of whom was employed in the trust department of a North Carolina bank. He related his concerns to them and asked them how their respective bank's trust department would interpret the trust provisions. He also inquired whether their respective banks would be interested in serving as the trustee.
These individuals informed Mr. Irvin that their respective banks would not be willing to serve as the trustee, unless the specific rights of the wife and daughter under the trust were clarified. They indicated that this could be accomplished either through the wife and daughter's concluding an agreement as to what their respective rights would be or through instituting a declaratory judgment action.
By letter dated January 25, 1988, Mr. Irvin advised Nancy Carpenter Reid and her husband of the potential conflict that might exist between Mrs. Reid and Ernestine Carpenter due to the will's provisions. He also advised them of the discussions he had with the two bank trust officers regarding the trust. In his letter, Mr. Irvin asked them to consider the possibility of reaching an agreement under which the trust would not be established and where Mrs. Carpenter and Mrs. Reid would instead receive outright the property which would have gone into the trust. Mr. Irvin's proposal to Mr. and Mrs. Reid was as follows:
Given the maturity of the two beneficiaries and the likely high costs of administering this trust, it appeared to me that the trust probably was not as good an idea as [decedent] * * * had thought. I raised with Bill the possibility of terminating the trust and distributing assets outright to each beneficiary...
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