Estate of Davis v. Commissioner
| Decision Date | 28 February 2003 |
| Docket Number | Docket No. 210-02. |
| Citation | 85 T.C.M. 944 |
| Parties | Estate of Ralph H. Davis, Deceased, Evelyn Davis, Personal Representative v. Commissioner. |
| Court | U.S. Tax Court |
Richard S. Calone, Robin Klomparens, and Jason W. Harrell, for the petitioners.
Kathryn K. Vetter, for the respondent.
Respondent determined a deficiency in the Federal estate tax of the Estate of Ralph H. Davis (estate) in the amount of $220,593. Unless otherwise indicated, all section references are to the Internal Revenue Code in effect on the date of death of Ralph H. Davis (decedent), and all Rule references are to the Tax Court Rules of Practice and Procedure. The issue to be decided in the instant case is whether the interest received by decedent's surviving spouse in certain property qualifies for the marital deduction pursuant to section 2056.
The parties submitted the instant case, fully stipulated, without trial, pursuant to Rule 122. The parties' stipulations of facts are hereby incorporated by this reference and are found as facts in the instant case.
Decedent was born on June 1, 1919, and died testate on July 14, 1997, at the age of 78, in Stockton, California. At the time of his death, decedent was a resident of San Joaquin County, California, and a citizen of the United States. During his lifetime, decedent worked for 44 years as an electrical engineer for Westinghouse Corporation.
Decedent was survived by his wife, Evelyn L. Kimball Davis (Evelyn Davis). Evelyn Davis, who resides in Stockton, California, is the personal representative of the estate. Decedent was also survived by his two daughters, Carol Tawney Pencke and Mary Martha Bennett.
On February 24, 1993, decedent executed a will (1993 will). The 1993 will names decedent's daughters, Carol Tawney Pencke and Mary Martha Bennett, as personal representatives of his estate. In Section 1.1 of the 1993 will, decedent indicated his intent to create another instrument which would dispose of his tangible personal property. Except as might otherwise be provided in such an instrument, the will left his tangible personal property to his daughters Carol Tawney Pencke and Mary Martha Bennett.
Article One, section 1.2, of the 1993 will provides for the care and transport of decedent's personal property and also provides for the disposition of insurance on such property. Article Two, section 2.1, of the 1993 will provides:
I give all the residue of my estate, to the Trustee under my Declaration of Trust dated the same date as this Will or if my said Declaration of Trust is not in existence or is not effective at the time of my death, to be held in trust on the same terms and conditions specified therein as it existed at the time of the execution of this Will or if [sic] the last Codicil hereto, with like effect as if the terms and conditions were set forth herein verbatim.
Article Three of the 1993 will appoints decedent's two daughters as personal representatives under the 1993 will. In the event that neither daughter can serve as personal representative, decedent appointed PNC Trust Company of Florida, N.A., to serve as the representative of his estate. Article Four of the 1993 will provides generally and specifically for the powers of the fiduciary or fiduciaries under the 1993 will. Article Five of the 1993 will provides for the payment of taxes, to be paid by the personal representative of the estate out of the principal of the estate.
On February 24, 1993, pursuant to a "Declaration of Trust", decedent established a trust (1993 trust) naming himself as grantor, trustee, and lifetime beneficiary (grantor and decedent being one and the same, grantor will hereinafter sometimes be referred to as "decedent"). Section 1.1 of Article One of the 1993 trust, entitled "Distribution of Income and Principal", provides:
During the grantor's lifetime, while he is serving as trustee, he shall be entitled to all of the net income ("Income") from the trust estate, payable in convenient installments, and he may withdraw such sums as he desires from principal at any time or times.
Section 1.2 of Article One of the 1993 trust provides [If] at any time or times the grantor shall be unable to manage his affairs, the successor trustee shall use such sums from the income and principal of the trust as the successor trustee deems necessary or advisable for his care, support and comfort, or for any other purpose the successor trustee considers to be for the grantor's best interests, adding to principal any income not so used.
Section 3.1 of Article Three of the 1993 trust provides:
Upon the grantor's death, the successor trustee shall distribute the residue of the trust estate as follows:
(a) The sum of TWENTY FIVE THOUSAND DOLLARS ($25,000.00) shall be paid by the successor trustee to the grantor's sister, MARIAN FRANCES DAVIS, if she survives the grantor.
(b) The rest of the Trust Estate shall be transferred and delivered in equal shares to the grantor's two daughters, CAROL TAWNEY PENCKE and MARY MARTHA BENNETT, the share of either of them who is deceased to go to her then living descendants, per stirpes or, if she has none, to be added to the share of the grantor's other daughter, or if she is deceased, to her descendants, per stirpes.
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(d) The interest of any beneficiary hereunder, including a remainderman, in Income or principal, shall not be subject to assignment, alienation, pledge, attachment or claim of creditors until after payment has actually been made by the successor trustee as hereinbefore provided.
Article Four of the 1993 trust provides for the powers of a trustee. Article Five of the 1993 trust names decedent's two daughters as successor trustees, and Article Five also provides that in the event that neither can serve as trustee, PNC Trust Company of Florida, N.A., shall serve as the successor trustee. Article Six of the 1993 trust provides for the grantor's powers, and Article Seven of the 1993 trust indicates that Florida law governs the trust. The 1993 trust was initially funded with securities with a total cost of $124,013 and a total market value of $207,637.73.
Decedent later married Evelyn Davis. On April 9, 1996, decedent executed a "First Codicil to Last Will" (codicil) and amended the trust by executing an "Amendment to Declaration of Trust of Ralph H. Davis" (amended trust)(the 1993 trust and the amended trust are collectively hereinafter sometimes referred to as the "testamentary trust").
The codicil modified the 1993 will and provided for the transfer of remainder of decedent's estate to the amended trust upon his death.1 In the codicil, the decedent indicated that trustee of the amended trust would receive all of the residue of his estate. The amended trust named Evelyn Davis as the successor trustee, whereupon surviving the decedent, she would become trustee of the amended trust.
The first paragraph of the codicil provides:
I hereby revoke paragraph Article Two, Section 2.1 of my Last Will and Testament dated February 24, 1993, and in its place, substitute the following:
I give all of the rest, residue and remainder of my estate to the trustee under my Declaration of Trust Dated February 24, 1993 as amended April 9, 1996 or if my said declaration of trust are not in existence or are ineffective at the date of my death, to be held in trust on the same terms and conditions as specified in the trust declaration and amendment to trust declaration as they existed at the date of execution of this Codicil to my Last Will and Testament. [Reproduced literally.]
The second paragraph of the codicil provides that all personal property found in decedent's residence shall remain in the surviving spouse's possession for her lifetime or so long as she uses the residence. The third paragraph of the codicil revoked the appointment of PNC Trust Company of Florida, N.A., as alternate representative under the will, and nominated the Bank of Stockton, California, as the alternate representative. The fourth paragraph confirmed and republished the provisions of the will not changed by the codicil.
Section Two of the amended trust provides:
Life Estate to Surviving Spouse of Trustor: After the death of trustor survived by his spouse and during the lifetime of his surviving spouse, the trustee shall pay to or apply for the benefit of the surviving spouse, in quarter annual or more frequent installments, all of the net income from the trust estate as the trustee, in the trustee's reasonable discretion, shall determine to be proper for the health, education, or support, maintenance, comfort and welfare of grantor's surviving spouse in accordance with the surviving spouse's accustomed manner of living.
Section Three of the amended trust provides Designation of Successor Trustees: The first successor trustee of the Ralph H. Davis Trust shall be his spouse, Evelyn L. Davis.
In the event Evelyn L. Davis shall die, become incapacitated or otherwise be unable to administer the trust estate, then grantor's daughters, Carol Tawney Pencke and Mary Martha Bennett, or the survivor of them shall serve as co-trustees without bond.
Section Four of the amended trust provides:
Guideline—Other Sources: Beneficiary: In making distributions to grantor's surviving spouse, the trustee, in her reasonable discretion, may consider any other income or resources of the beneficiary known to the trustee and reasonably available.
Section Five of the amended trust provides:
Invasion of Principal for Surviving Spouse— Narrow Standard: If the trustee shall determine that the income from this trust and that the income and principal from the surviving spouse's own trust2 shall be insufficient to maintain surviving spouse's health, support, and maintenance, the trustee may, after surviving spouse has exhausted all assets of her own trust, invade the principal of this trust for the benefit of surviving spouse, in the...
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