Ex Parte Forrester

• Decision Date: 10 June 2005
• Docket Number: 1040235.
• Citation: 914 So.2d 855
• Parties: Ex parte Howard FORRESTER, as executor of the estate of Louise Forrester, (In re Susan Louise Phelps Hollis et al. v. Howard Forrester, as executor of the estate of Louise Forrester; et al.)
• Court: Alabama Supreme Court

914 So.2d 855

Ex parte Howard FORRESTER, as executor of the estate of Louise Forrester (In re Susan Louise Phelps Hollis et al. v. Howard Forrester, as executor of the estate of Louise Forrester; et al.)

1040235.

Supreme Court of Alabama.

April 8, 2005.

Rehearing Denied June 10, 2005.

William P. Gray, Jr., and Harry O. Yates, Jr., of Gray & Associates, L.L.C., Birmingham; and Douglas L. McWhorter

of Dominick, Fletcher, Yeilding, Wood & Lloyd, P.A., Birmingham, for petitioner.

Charles D. Rosser of Rosser, Marthaler & Rosser, Tuscumbia, for respondents.

LYONS, Justice.

Howard Forrester, as the executor of the estate of Louise Forrester, appeals from the Court of Civil Appeals' reversal of the judgment of the Jefferson Probate Court.¹ We affirm.

I. Facts and Procedural History

The Court of Civil Appeals stated the relevant facts in Hollis v. Forrester, 914 So.2d 852, 852-54 (Ala.Civ.App.2004):

"The record reveals that George Edward Lourie (`George') and Emily Barnes Lourie (`Emily'), a married couple, executed wills on January 21, 1983. George predeceased Emily, and his will was admitted to probate in Jefferson County in 1997. In addition to stating several specific bequests, George's will provided that if Emily survived him, the residue of his estate was to be divided into two parts, which were designated as the `Marital Share' and the `Family Share.' George intended that all or part of the `Marital Share' would constitute estate-tax-advantaged `qualified terminable interest property' (`QTIP') under § 2056(b)(7) of the United States Internal Revenue Code should his executors make an election to that effect. George's executors made such an election, and, pursuant to the terms of George's will, the moneys allocated to the `Marital Share' were paid into two separate trusts, a non-QTIP `Exempt Marital Trust' and a QTIP `Non-Exempt Marital Trust.' The effect of the executors' election was to allocate the assets in the `Non-Exempt Marital Trust' to Emily's estate for estate-tax purposes rather than subjecting them to estate taxation upon George's death; however, George's will also provided that upon Emily's death, the corpus of the `Non-Exempt Marital Trust,' as well as the corpus of the `Exempt Marital Trust' and the `Family Trust,' would pass to the three daughters of his sister Dorothy L. Phelps: Susan Louise Phelps Hollis, Ann Lourie Phelps Nichols, and Margaret Jo Phelps Snow (`the nieces').

"Emily died in March 2001, and her will was admitted to probate in Jefferson County soon thereafter; AmSouth Bank, N.A. (`AmSouth'), as successor to the First National Bank of Birmingham, was named executor of Emily's will. In addition to various bequests of personal property and testamentary gifts of life-insurance proceeds, Emily's will provided, in pertinent part, that the residue of her estate would pass to George or, if he should die before her, to George's sister Dorothy L. Phelps (who also died before Emily). Emily's will did not contain any provision concerning the payment of estate taxes.

"In June 2002, AmSouth filed a `Petition for Instructions' in the Jefferson Probate Court. . . . AmSouth later amended its petition for instructions so as to request that the probate court determine whether the Alabama estate tax attributable to the inclusion of the `Non-Exempt Marital Trust' in Emily's estate should be paid out of the corpus of that trust or from Emily's estate.[²]

"... The parties filed stipulations of facts that, among other things, addressed the estate-tax-liability issue, and they filed briefs concerning their respective positions as to that issue. The probate court, on December 29, 2003 ... declared that the Alabama estate taxes attributable to the inclusion of the `Non-Exempt Marital Trust' in Emily's estate should be borne by that trust and not by the estate, and `ratified and approved' AmSouth's payment of those taxes from that trust."

(Emphasis added.)

The Court of Civil Appeals reversed the judgment of the probate court and held that the Alabama estate taxes should have been paid from the residue of Emily's estate, rather than from the corpus of the QTIP trust. As a result of the Court of Civil Appeals' ruling, because the corpus of the trust was left to George's three nieces — Susan Louise Phelps Hollis, Ann Lourie Phelps Nichols, and Margaret Jo Phelps Snow ("the nieces") — their bequest was not reduced by the Alabama estate taxes due on Emily's death. We granted Forrester's petition for certiorari review to determine whether the Court of Civil Appeals was correct in its ruling.

II. Standard of Review

"[B]ecause the underlying facts are not disputed and this appeal focuses on the application of the law to those facts, there can be no presumption of correctness accorded to the trial court's ruling." Beavers v. County of Walker, 645 So.2d 1365, 1373 (Ala.1994) (citing First Nat'l Bank of Mobile v. Duckworth, 502 So.2d 709 (Ala.1987)). Appellate review of a ruling on a question of law is de novo. See Rogers Found. Repair, Inc. v. Powell, 748 So.2d 869 (Ala.1999); Ex parte Graham, 702 So.2d 1215 (Ala.1997).

III. Analysis

Generally speaking, the value of property passing from a decedent to his or her surviving spouse is deducted from the decedent's gross estate for the purpose of calculating federal estate-tax liability. See I.R.C. § 2056 (allowing a "marital deduction" for the value of property passing to a surviving spouse). In certain situations, the Internal Revenue Code allows the marital deduction for the value of property transferred to a surviving spouse even though the spouse receives less than full ownership rights in the property transferred. One such transfer is described as a "Qualified Terminable Interest Property" ("QTIP") trust. The United States Court of Appeals for the Ninth Circuit, in Davis v. Commissioner, 394 F.3d 1294, 1297-98 (9th Cir.2005), briefly described the requirements of the QTIP trust and its relationship to the marital deduction:

"Under the Internal Revenue Code, the taxable estate of a decedent is computed by taking the gross estate defined in section 2031 and subtracting the deductions listed in sections 2053, 2054, 2055 and 2056. I.R.C. § 2051. Section 2056 describes the marital deduction. Although property passing from a decedent to a surviving spouse generally qualifies for a marital deduction from the federal estate tax, I.R.C. § 2056(a), life estates and other terminable interests passing to a surviving spouse are not deductible unless they qualify for an exception under section 2056(b)(5) or section 2056(b)(7). I.R.C. § 2056(b)(1).

"To qualify for a marital deduction under section 2056(b)(7), a marital trust must consist of property `(I) which passes from the decedent, (II) in which the surviving spouse has a qualifying income interest for life, and (III) to which an election under [section 2056(b)(7)] applies.' I.R.C. § 2056(b)(7)(B)(i). A deduction under section 2056(b)(7) is also known as a Qualified Terminable Interest Property, or QTIP, deduction. A surviving spouse has a `qualifying income interest for life' if he or she is `entitled to all the income from the property, payable annually or at more frequent intervals, or has a usufruct interest for life in the property,' and `no person has a power to appoint any part of the property to any person other than the surviving spouse.' I.R.C. § 2056(b)(7)(B)(ii)."

(Footnotes omitted.)

While the decedent is afforded the marital deduction for the value of property transferred in a QTIP trust, the value of that property is included in the estate of the surviving spouse when he or she dies. See I.R.C. § 2044. However, I.R.C. § 2207A allows the executor of the estate of the surviving spouse to collect from the person receiving the property formerly held in the trust the amount of federal estate tax resulting from the presence of a QTIP trust:

"(a) Recovery with respect to estate tax.—

"(1) In general.—If any part of the gross estate consists of property the value of which is includible in the gross estate by reason of section 2044 (relating to certain property for which marital deduction was previously allowed [in this case, the QTIP trust]), the decedent's estate shall be entitled to recover from the person receiving the property the amount by which—

"(A) the total tax under this chapter which has been paid, exceeds

"(B) the total tax under this chapter which would have been payable if the value of such property had not been included in the gross estate.

"(2) Decedent may otherwise direct. —Paragraph (1) shall not apply with respect to any property to the extent that the decedent in his will (or a revocable trust) specifically indicates an intent to waive any right of recovery under this subchapter with respect to such property."

(Emphasis added.)

Standing in marked contrast to I.R.C. § 2207A is § 40-15-18, Ala.Code 1975, the provision of the Alabama Revenue Code addressing the allocation of the burden of state and federal estate taxes. Section 40-15-18 states:

"Unless the decedent directs otherwise in his will, all estate taxes, whether state or federal, payable by reason of the death of the decedent, shall be paid by the executor or other personal representative out of the estate property and shall be a charge against the residue thereof, and the executor or other personal representative shall be under no duty to recover from anyone for the benefit of the estate the pro rata portion of the estate tax attributable to inclusion in the gross estate of any property, including proceeds of policies of insurance upon the life of the decedent receivable by a beneficiary other than the executor or other personal representative, which does not pass to the executor or other personal representative as a part of the estate."

(Emphasis added.)

While § 40-15-18 purports to address the burden of both state and federal estate taxes, I.R.C. § 2207A preempts § 40-15-18 with respect to allocating the...