Estate of Whiting v. Commissioner
| Decision Date | 17 March 2004 |
| Docket Number | Docket No. 13268-01. |
| Parties | Estate of Merle Allen Whiting, Jr., Deceased, Vicki Ann Whiting, Executrix v. Commissioner |
| Court | U.S. Tax Court |
Keith Moser, for the petitioner.
Edsel Ford Holman, Jr., for the respondent.
Respondent determined a deficiency of $206,6121 in the Federal estate tax of the Estate of Merle Allen Whiting, Jr. (decedent), and an addition to tax pursuant to section 6651(a)(1)2 of $10,331. The deficiency arises from respondent's disallowance of the marital deduction for a trust which held property valued at $533,762 at the time of decedent's death. The sole issue3 for decision is whether under section 2056(b)(7) the surviving spouse's interest in the "Marital Deduction Trust" qualifies for the marital deduction.
The parties submitted this case fully stipulated pursuant to Rule 122. The stipulation of facts and the attached exhibits are incorporated herein by this reference. At the time the petition was filed, the mailing address for the estate and for the executrix was in Dewitt, Arkansas.
Decedent was in the business of farm equipment sales. Around May 1996, 18 months before his death, decedent had an operation, after which the doctor informed him that he had terminal lung and colon cancer. Immediately following decedent's operation, the doctor estimated that decedent had a maximum of 2 years to live. Following his operation and terminal illness diagnosis, decedent ceased his regular activities. Decedent did not have any treatments that would have attempted to cure or slow his cancer.
Decedent's certified public accountant informed him that he needed an estate plan. On September 17, 1997, decedent and his wife, Vicki Ann Whiting (Mrs. Whiting), met with an attorney at the firm of Jewell & Moser concerning the drafting of an estate plan. Jewell & Moser is a six-attorney firm in Little Rock, Arkansas. Two attorneys are Arkansas board recognized specialists in tax law. One attorney is a certified public accountant. Two attorneys have a master of laws in taxation.
On October 13, 1997, decedent and Mrs. Whiting executed the Merle Allen Whiting, Jr., and Vicki Ann Whiting Trust (the trust). On the same date, decedent executed his last will and testament (the will). Decedent was aware that he was terminally ill with lung and colon cancer when he executed the trust and the will.
The draftsman of the trust prepared only one draft for decedent to review and execute. The intent of the draftsman was to create a marital deduction trust that qualified for the Federal estate tax marital deduction. Decedent read the trust and the will without asking any questions or raising any objections. Neither decedent nor Mrs. Whiting exchanged any correspondence with the draftsman of the trust or the will.
On November 4, 1997, 22 days after executing the trust and the will, decedent died. He was 50 years old. Mrs. Whiting survived decedent. She was 48 years old when decedent died.
The trust was initially funded with $10. During the 22-day period between the date the trust was executed and the date of decedent's death, substantial amounts of decedent's real estate holdings were transferred to the trust as trust corpus. Upon decedent's death, life insurance proceeds also funded the trust.
Decedent and Mrs. Whiting were the grantors of the Merle Allen Whiting, Jr., and Vicki Ann Whiting Trust. While both grantors were alive, the trust was revocable.
Purpose. The stated purpose of the trust was to create a means
Grantors' Separate Trust Shares. Upon receipt of property in the trust, the trustee "shall establish an undivided separate trust share for Merle Allen Whiting, Jr., equal to fifty percent (50%) of the property received and an undivided separate trust share for Vicki Ann Whiting equal to fifty percent (50%) of the property received."
Death of First Grantor. Upon the death of the first grantor to die, "the Trustee shall divide the decedent's separate share of the trust into four (4) separate trusts." The first trust is the "Marital Deduction Trust" (marital deduction trust). The second trust is the "Madge Williams Whiting Evans Trust", established for decedent's mother. The third trust is the "Courtney Brook Whiting Phaffenberger Trust", established for decedent's daughter. The fourth trust is the "Non-Marital Deduction Trust".
The trust becomes irrevocable as to the deceased grantor's separate trust share immediately upon the death of the first grantor to die. Additionally, "the surviving Grantor shall have no right or power * * * to alter, amend, modify, revoke or terminate this Trust Agreement * * * as to the deceased Grantor's separate trust share."
Amount of Distribution. The amount of the distribution from decedent's separate trust share to the marital deduction trust, as stated in section 7.A. of the trust agreement, is as follows:
A distribution shall be made to this trust of an amount equal to the excess, if any, of the decedent's taxable estate (computed without any marital deduction) plus the amount of the decedent's adjusted taxable gifts, over the exemption equivalent of the then applicable unified credit against estate tax, said excess being reduced by the aggregate value (using federal estate tax values, as finally determined) of all property and interests in property included in the decedent's gross estate which qualifies for the federal estate tax marital deduction and which pass or have passed in a form which qualifies for such marital deduction from the decedent to the surviving spouse pursuant to Will, by operation of law, pursuant to contract or otherwise than by this provision.
The words "adjusted taxable gifts", "gross estate", "marital deduction", "pass or have passed", "taxable estate" and "unified credit against estate tax" shall have the same meanings as such words have under the Internal Revenue Code provisions applicable to the decedent's estate * * *.
* * * * * * *
Only assets that qualify for the marital deduction shall be available for selection by the Trustee in the fulfillment of this distribution. Each asset selected by the Trustee to be distributed in kind for the purpose of satisfying the amount of this distribution to the surviving spouse shall be valued for such purposes at the lower of:
(i) its fair market value at the time of distribution, or
(ii) its value for federal estate tax purposes * * *.
Although the decedent's intent in directing this method of valuation for distributions in kind in satisfaction of a pecuniary bequest is to eliminate any recognition of gain with respect to appreciated assets available for distribution, it also has the result of qualifying the marital deduction for estate tax purposes.
Terms. The relevant terms of the marital deduction trust, as stated in section 8 of the trust agreement, are as follows:
A. Distribution of Income and Principal. After the payment of all reasonable and necessary expenses incurred in the management of the trust, the trustee shall distribute at least annually the net income of the trust to or for the benefit of the surviving spouse for the remainder of the surviving spouse's life. Any income accrued, but undistributed, as of the date of the surviving spouse's death shall be paid to the surviving spouse's estate * * *.
The trustee is authorized to distribute to or for the benefit of the surviving spouse so much of the principal of this trust as in the trustee's absolute discretion may be necessary or advisable for the health, education, maintenance and support of the surviving spouse.
The surviving spouse is authorized to withdraw from the principal of this trust such additional amounts as the surviving spouse may request, provided that such distributions from the principal of this trust shall not exceed in any calendar year the greater of $5,000.00 or five percent (5%) of the value of the principal of this trust * * *.
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No distribution of the principal of this trust * * * shall be made to or for the benefit of the surviving spouse following the remarriage or cohabitation of the surviving spouse.
B. Termination of Trust. This trust shall terminate upon the surviving spouse's death, at which time the remaining assets of this trust shall be distributed as follows:
* * * * * * *
(2) The remaining balance shall be distributed to or in trust for the benefit of such persons or entities * * * as the surviving spouse may appoint by specific reference to this trust in the surviving spouse's Last Will and Testament, provided that no appointment shall be made to the surviving spouse, the surviving spouse's estate, the surviving spouse's creditors or the creditors of the surviving spouse's estate. In partial or complete default of an effective exercise of this special power of appointment, or in the event of the surviving spouse's remarriage or cohabitation, then the remaining assets of this trust shall be distributed in the same manner as provided in Section 104 of this trust.
C. Trustee. The following persons or entities shall serve as the trustee of this trust in the following order of priority:
(1) Surviving spouse.
(2) * * * However, in the event that Vicki Ann Whiting is the surviving spouse, her son, Charles Barry McKewen, shall serve as successor trustee.
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D. Administrative Provisions. Sections 15, 16, 17, 18, 19, 20, 21, 22, 23, 24, 25, 26 and 27 * * * shall apply to this trust.
The trustee funded the marital deduction...
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