Estate of Trombetta v. Comm'r Revenue
| Decision Date | 21 October 2013 |
| Docket Number | T.C. Memo. 2013-234,Docket No. 23892-10 |
| Parties | ESTATE OF HELEN A. TROMBETTA, DECEASED, GAIL C. DOLE, EXECUTRIX, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
William E. Bonano and Richard M. Eigner, for petitioner.
Chong S. Hong and Rebecca S. Duewer-Grenville, for respondent.
COHEN, Judge: Respondent determined a $6,464,225 deficiency in the Federal estate tax of the Estate of Helen A. Trombetta (estate). The issues for decision are: (1) whether the value of property transferred by Helen A. Trombetta (decedent) to the Helen Trombetta Annuity Trust (annuity trust) is includable inthe gross estate pursuant to section 2036(a), 2038(a)(1), or 2035(a); (2) whether the value of property transferred by decedent to the Helen Trombetta Personal Residence Trust (residence trust) is includable in the gross estate pursuant to section 2036(a), 2038(a)(1), or 2035(a); (3) whether the estate is entitled to a deduction claimed for mortgages payable secured by annuity trust assets; and (4) whether the estate is entitled to a charitable contribution deduction.
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the date of 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 the stipulated facts are incorporated in our findings by this reference. Decedent resided in California at the time of her death. Gail C. Dole (G. Dole) was appointed executrix of the estate, and she resided in California at the time the petition was filed.
At a date not apparent from the record, decedent married Joseph Trombetta (J. Trombetta). Decedent and J. Trombetta had four children: Joan Adele Clendenin, Carol Ann Carroll (Carroll), G. Dole, and Thomas Leon Trombetta (T. Trombetta).During their marriage decedent and J. Trombetta owned various rental properties. Decedent managed the day-to-day operation of the properties, including cleaning, painting, gardening, and collecting rent, while J. Trombetta managed the financial operation of the properties. At a date not apparent from the record decedent reduced her property management obligations while J. Trombetta continued to purchase additional rental properties.
In 1986 decedent and J. Trombetta purchased an apartment building with 27 units known as Black Walnut Square (Black Walnut Square property). In 1988 decedent and J. Trombetta purchased an apartment complex with 79 units known as Tierra Plaza (Tierra Plaza property). Decedent and J. Trombetta purchased the Black Walnut Square and Tierra Plaza properties subject to significant debt, and they personally were liable on the mortgages secured by those properties.
Decedent and J. Trombetta subsequently decided to separate. Following their separation decedent purchased a residential property in Modesto, California (Modesto property), for $249,000.
Decedent and J. Trombetta's marriage was dissolved by a judgment filed May 20, 1992. Pursuant to the divorce judgment, decedent received various rental properties, including the Tierra Plaza and Black Walnut Square properties. The divorce judgment provided that decedent would hold J. Trombetta harmless fromthe liens and encumbrances attributable to the properties. At the time, the Tierra Plaza and Black Walnut Square properties were highly leveraged.
After her divorce decedent's primary assets were the various rental properties she received pursuant to the divorce judgment, as well as the Modesto property. Decedent primarily depended on the income from the Tierra Plaza and Black Walnut Square properties for her living expenses.
In 1992 decedent hired Richard M. Eigner, an attorney, and Paul E. Korte, a certified public accountant, to advise her regarding estate planning. In particular decedent requested that Eigner help her develop an estate plan that would allow her to: (1) maintain a cashflow of approximately $10,000 per month; (2) establish a cash reserve of $100,000 for emergencies; (3) reduce her personal involvement in managing the rental properties; (4) reduce her financial risk; and (5) provide for the benefit of her children while minimizing any estate and gift tax consequences.
To achieve these objectives, decedent and Eigner developed a comprehensive and integrated estate plan. In August 1993, at the age of 72, decedent executed a will and created the Helen Trombetta Living Trust, the annuity trust, and the residence trust. She also formed a limited partnership, Helen Properties L.P. (Helen Properties), and transferred to Helen Properties her interestsin all of the rental properties except the Tierra Plaza and Black Walnut Square properties.
Decedent was the grantor of the annuity trust and its sole beneficiary. Decedent, Carroll, G. Dole, and T. Trombetta were the cotrustees. Decedent was vested with 50% of the annuity trust voting rights, and the other cotrustees split the remaining voting rights. The annuity trust agreement provided that "[d]ecisions of the trustees may be taken by majority vote of all trustees". (Emphasis added.)
The annuity trust agreement provided for an annuity term of 180 months subject to decedent's power to reduce the term. During the annuity term the trustees would distribute to decedent, at quarterly or more frequent intervals, an annual sum of $75,000 for the first 12-month period of the annuity term, with a 4% increase at the beginning of each successive 12-month period (periodic payments). After termination of the annuity trust term the annuity trust was prohibited from making any distributions to decedent.
Carroll, G. Dole, and T. Trombetta, as cotrustees, agreed that they would be jointly and severally liable for any periodic payment in the event that the annuity trust lacked sufficient funds to make such payment. However, if the annuity trustincome exceeded the periodic payment due, the annuity trust agreement provided that the cotrustees could distribute the excess income to decedent or allow the income to accumulate in the trust. At the later of the end of the annuity trust term or the date of decedent's death, the annuity trust property would pass to decedent's surviving children or grandchildren.
The annuity trust agreement anticipated decedent's transfers to the trust of the Tierra Plaza and Black Walnut Square properties. The agreement provided that the cotrustees were entitled to "manage, control, lease, grant options on, mortgage, sell, convey, exchange, partition, divide, subdivide, improve, change the character of, develop, repair, abandon and demolish trust property." The cotrustees could employ individuals as property managers or custodians to assist with administration of the trust property. The annuity trust agreement also provided that decedent intended her retained interest in the properties to qualify as a qualified interest under section 2702(b)(1).
Decedent subsequently transferred to the annuity trust the Tierra Plaza and Black Walnut Square properties. At the time of the transfers, the Tierra Plaza property was security for aggregate indebtedness of approximately $2,020,000, the Black Walnut Square property was security for indebtedness of approximately $884,000, and decedent had an adjusted basis in the properties of $1,302,941.Following decedent's transfers of the properties to the annuity trust the annuity trust paid the interest and principal owed on the indebtedness, although the annuity trust never assumed the mortgages secured by the properties.
Decedent's transfers of the properties were the only transfers to the annuity trust. The annuity trust agreement prohibited any additional contributions of property to the annuity trust.
Decedent reported the transfers of the properties to the annuity trust on her Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return, for 1993. On an attached schedule decedent reported that the properties had a net value of $1,425,802, that she had a retained interest of $921,809, and that she had made a gift of $503,993, the remaining value.
Decedent was grantor, trustee, and the sole beneficiary of the residence trust. The residence trust agreement provided that decedent had the right to use any trust property as a personal residence and the right to receive the net income from the trust. The only limitation on decedent's right to use the trust property was the residence trust term. The term of the trust was 180 months, subject to decedent's power to reduce the term. The residence trust agreement furtherprovided that decedent intended the residence trust to qualify as a qualified personal residence trust under section 2702.
Upon termination of the residence trust term decedent or her estate would receive the trust property and any accrued income. If decedent was living at termination, the trust property would be distributed equally to her children or their children. If decedent was deceased at termination, the trustee would distribute the balance of the trust property as directed by decedent's will or, if not so directed, equally to decedent's children or their children.
Decedent subsequently transferred the Modesto property to the residence trust. At the time of the transfer, decedent had an adjusted basis in the Modesto property of $399,637. Decedent's transfer of the Modesto property was the only transfer to the residence trust.
On her Form 709 for 1993 decedent reported the transfer of the Modesto property to the residence trust. On an attached schedule decedent reported that the Modesto property had a net worth of $150,000, that she had a retained interest of $92,491, and that she had made a gift of $57,509, the remaining value.
On August 1, 1993, decedent received from the annuity trust her first periodic payment of $6,250 and she continued to receive monthly periodic payments...
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