Estate of Halpern v. Commissioner
| Decision Date | 31 July 1995 |
| Docket Number | Docket No. 5413-92. |
| Citation | 70 T.C.M. 229 |
| Parties | Estate of Lillian L. Halpern, Deceased, Bernard M. Halpern and Irving J. Halpern, Executors v. Commissioner. |
| Court | U.S. Tax Court |
Richard I. Halpern and Dale Hershey, Pittsburgh, Pa., for the petitioner. Julia L. Wahl, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined a deficiency of $187,150 in petitioner's Federal estate tax. Respondent's amended answer increased the total deficiency to $517,595.
After concessions by both sides, the issues for decision are whether distributions during the years 1982 through 1988 from the marital deduction trust under the will of Julius Halpern (the marital trust) are included in the gross estate of his wife Lillian L. Halpern (decedent) under one or both of sections 2038 and 2041 and therefore subject to Federal estate tax. All section references are to the Internal Revenue Code in effect as of May 17, 1988, the date of decedent's death, and all Rule references are to the Tax Court Rules of Practice and Procedure.
We hold that the distributions made in 1982, 1983, 1984, 1985, and 1986 are not included in decedent's gross estate and that the 1987 and 1988 distributions are so included.
At the time of filing the petition, petitioner's executors resided in Pittsburgh, Pennsylvania.
Decedent's husband, Julius Halpern (Julius), died in 1962. Other family members who figure in what follows are their sons, Bernard M. Halpern (Bernard) and Irving J. Halpern (Irving); Bernard's wife, Ethelmarie A. Halpern; Irving's wife, Caryl A. Halpern; Bernard's children, Richard I. Halpern (Richard) and Eileen L. Lane (Eileen); Eileen's husband, Nicholas D.J. Lane; Eileen's children, Adam J.B. Lane and Erica B. Lane; Richard's wife, Barbara S. Halpern; Richard's children, Stephanie L. Halpern and Alexandra S. Halpern; and Irving's children, Stephen F. Halpern (Stephen) and Jeffrey D. Halpern (Jeffrey). These family members (the family donees) were the only recipients of the questioned distributions, except that some distributions were made to Eiriste Properties (Eiriste), an inter vivos trust established by Julius for the benefit of his grandchildren, of which Stephen and Jeffrey were the sole beneficiaries in all years relevant to the case at hand.
Julius' will named decedent, Bernard, Irving, and Julius' brother Alfred J. Halpern as trustees of the marital trust. Alfred died in 1975 and was replaced as trustee by Richard. Julius' estate claimed and was allowed the marital deduction under section 2056 for the assets of his estate transferred to the marital trust.
The marital trust provision of Julius' will is as follows:
I give, devise and bequeath to my Trustees, without deduction for any estate, inheritance or other tax, a portion of my estate the value of which shall be computed as set forth in paragraph (B) of this clause. Said portion of my estate shall be held by my Trustees, separately, IN TRUST to [sic] my wife during her life all the income of this trust and until her remarriage to pay or apply to her use out of principal, in any year in which the income is insufficient for this purpose, such an amount as when added to the income will exceed by $10,000.00 the aggregate of her income taxes, real estate taxes on her residence and the cost of proper maintenance and repair of her residence; and in addition to pay or apply to her use at any time and from time to time during her life such part or parts of the principal of this trust even to the extent of all thereof as my Trustees may deem necessary or suitable for her comfortable maintenance and welfare in the event of illness or other emergency; and upon her death to dispose of the then remaining principal of this trust, if any, as she may appoint in any manner, outright or otherwise, and in favor of any appointee or appointees she may designate in her sole discretion; and I hereby declare said power to appoint to be exercisable by my wife in favor of her own estate or in favor of any others; and in default of such appointment, I give, devise and bequeath the then principal of this trust to my heirs determined in accordance with the Intestate Laws of the State of Pennsylvania.
Thus, Julius gave decedent a testamentary general power of appointment over the trust assets and provided that, if she failed to exercise that power, the trust assets would go to his heirs determined under the intestate laws of the State of Pennsylvania. By reason of that power, the assets of the marital trust are includable in decedent's gross estate for Federal estate tax purposes.
After Julius' death in 1962, the income from the substantial assets owned by decedent and held for her benefit in the marital trust were more than sufficient to satisfy her relatively modest needs. Prior to 1982, decedent had made only sporadic gifts to family members in amounts less than the per donee annual gift tax exclusion under section 2503(b). In 1982, decedent's sons, Bernard and Irving, recommended to her that she begin a series of annual gifts that would take advantage of the $10,000 per donee annual exclusion, fulfill her interest in providing financially for the family donees during her lifetime, and reduce the estate tax liability of her estate. However, because Bernard's and Irving's families were of unequal size (Stephen and Jeffrey were then unmarried), there was a felt need to create a giving formula that both branches of the family would regard as fair.
On February 4, 1982, Richard, who is an attorney and petitioner's first counsel of record in this case, sent Bernard a letter discussing how to make gifts from the property of decedent and the marital trust that would equalize the interests of the two branches of the family. Richard's letter makes clear that decedent, Bernard, Irving, and Richard, who were then the trustees of the marital trust, understood that the provisions of the marital trust did not authorize gifts of trust principal during decedent's lifetime. Richard recommended that consents and indemnification agreements be obtained from decedent and the family donees, as the only persons in being who had any present or contingent right or interest in the marital trust. Although Richard advised that distributions from the marital trust without obtaining court approval would be "risk distributions" under Pennsylvania law,1 he stated that "obtaining court approval seems wholly unnecessary and extravagant so long as the consents and indemnification are obtained."
In a memorandum dated June 9, 1982, Richard recommended a formula for making annual gifts from decedent's own property and from the marital trust. Under the formula, members of Bernard's family each would receive the maximum $10,000 annual excludable gift, whereas Irving's sons and Eiriste would receive additional amounts — encroaching on the unified gift and estate tax credit — that were intended to provide for the future spouses and children of Irving's sons. Bernard and Irving agreed that the formula was fair and should be implemented. They explained it to decedent, who agreed that the formula was fair and that the contemplated gift-giving program would promote family harmony and should be implemented.
Richard thereupon prepared a document entitled "Direction and Consent to Distribution from Trust under the Will of Julius Halpern Deceased" (First Consent), which provided for gifts by decedent to the family donees of 66 shares of Charles Buildings, Inc. (CBI), held in her own name and the distribution to the family donees of 74 shares of CBI held in the marital trust. On or about July 19, 1982, decedent and all the family donees (or custodians acting on their behalf) signed the First Consent, and the contemplated distributions occurred in 1982. The First Consent directed the trustees to "promptly distribute gratis" the CBI shares to the family donees in specified amounts, set no conditions to the distributions, provided for no retention by decedent or any of the trustees of any power over the distributed assets, and contained the envisioned consents and indemnification agreements of decedent and all the family donees. The First Consent referred to the marital trust, the trustees' powers, the trust's intent or purpose, and the desires and circumstances of decedent and the family donees. The First Consent made no reference to other assets to be subsequently distributed from the marital trust, nor even to a general intention to make subsequent distributions from the marital trust. A timely filed United States Gift Tax Return was filed on behalf of decedent reporting as gifts all the 1982 transfers of CBI stock, both the shares held by decedent and the shares distributed from the marital trust.
The pattern of giving initiated with the First Consent was continued in later years. On January 5, 1983, the same parties signed the Second Consent, under which 120 shares of CBI were to be distributed from the marital trust to the family donees. On June 11, 1984, the Third Consent was signed, under which 107.46 shares of common stock in Banksville, Inc., were to be distributed from the marital trust to the family donees. On or about February 1, 1985, the Fourth Consent was signed, under which 49.29 shares of common stock in Banksville, Inc., and 170.4 shares of common stock in Halpern Buildings, Inc., were to be distributed from the marital trust to the family donees. On or about January 1, 1986, the Fifth Consent was signed, under which 215.1 shares of common stock in Halpern Buildings, Inc., were to be distributed from the marital trust to the family donees. The terms of each of these Consents were in substance identical with those of the First Consent, except that each of them specified different items of property to be distributed. None of the Consents made any mention or even hint of distributions in future years.
The assets that the foregoing...
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