Gordon v. Posner

• Decision Date: 31 January 2002
• Docket Number: No. 2295,2295
• Citation: Gordon v. Posner, 142 Md. App. 399, 790 A.2d 675 (Md. App. 2002)
• Parties: Jean Posner GORDON et al. v. David B. POSNER et al.
• Court: Court of Special Appeals of Maryland

790 A.2d 675

142 Md. App. 399

Jean Posner GORDON et al. v. David B. POSNER et al.

No. 2295, September Term, 2000.

Court of Special Appeals of Maryland.

January 31, 2002.

Shale D. Stiller (Kurt J. Fisher and Piper, Marbury, Rudnick & Wolfe, LLP, on the brief), Baltimore, for appellants.

Peter E. Keith (Bonnie A. Travieso, Gallagher, Evelius & Jones, LLP, Baltimore, E. Pete Summerfield and Summerfield, Willen, Silverberg & Limsky, P.A., Owings Mills, on the brief), for appellee, Posner.

James A. Dunbar, Mark D. Maneche and Venable, Baetjer and Howard, LLP, on the brief, Baltimore, for appellee, McDonagh.

Argued before ADKINS, PAUL E. ALPERT, (Retired, Specially Assigned), JOHN J. BISHOP, Jr., (Retired, Specially Assigned) JJ. ADKINS, Judge.

The issue in this case is who should bear federal and state estate taxes for the estate of Rose Posner ("Rose") attributable to a $4.9 million Marital Trust that was created under the will of Rose's late husband. Jean Posner Gordon, M.D. and Judith Geduldig, appellants and cross-appellees, contend that the trial court erred in concluding that the Maryland Uniform Estate Tax Apportionment Act, Maryland Code (1988, 1997 Repl.Vol.), section 7-308 of the Tax General Article ("TG") (the "Tax Apportionment Act") applies, and requires payment of a portion of the tax from their interests in the Marital Trust. We shall hold that the trial court was correct when it determined that Rose did not elect to opt out of the Tax Apportionment Act in her will or Revocable Trust.

FACTS AND LEGAL PROCEEDINGS

Nathan Posner ("Nathan") died on April 21, 1975, survived by his wife, Rose, and his three children: daughters Judith Geduldig and Jean Posner Gordon (the "Daughters") and son David B. Posner, M.D. ("David"). Rose died 21 years later, on October 28, 1996. David was appointed personal representative of Rose's estate.

Nathan left a will devising one-half of his estate to a trust for the benefit of Rose (the "Marital Trust"), but omitting the clauses expressing the terms of the trust. The absence of trust terms created doubt as to whether the Marital Trust would qualify for the federal estate tax marital deduction, which would enable Nathan's estate to defer taxes on the assets in the Marital Trust until the death of Rose. At the time of Nathan's death, in order to qualify a trust for the surviving spouse's benefit as a marital trust, the spouse had to be given the right to all income, and a general power of appointment over the trust assets. See 26 U.S.C. § 2056 (1981), amended by Pub.L. No. 97-34, § 403(d)(1).

Although Nathan's will did not otherwise provide for either the income interest or the power of appointment, it did have a marital deduction "savings clause." This clause provided:

Anything in this Will to the contrary notwithstanding, ... my Trustee shall not have or exercise any authority, power or discretion over the Marital Trust or the income thereof, or the property constituting the same, nor shall any payment or distribution by my Trustee be limited or restricted by any provision of this Will, which would in any way (a) adversely affect the qualification of the Marital Trust, (b) prevent my estate from receiving the benefit of the maximum marital deduction, or (c) affect the right of my said wife to all income therefrom or her right to dispose of the principal and income thereof in the amount and to the extent necessary to qualify the Marital Trust for the marital deduction for Federal estate tax purposes ...

The balance of Nathan's estate, after the bequest to the Marital Trust, passed to a residuary trust, which eventually passed in equal parts to David and the Daughters. James P. McDonagh, appellee, serves as trustee of the Marital Trust.

Notwithstanding the omissions in Nathan's will, his personal representative claimed the marital deduction for the assets passing to the Marital Trust on Nathan's federal estate tax return, and attached a copy of Nathan's will to that return. The Internal Revenue Service (the "IRS") audited the return, but did not question the deductibility of the Marital Trust.

Nearly twenty one years after her husband's death, on January 3, 1996, Rose executed a will which purported to exercise her power of appointment over the Marital Trust, directing that its assets be paid to an inter vivos Revocable Trust (the "Revocable Trust") that had been created on the same day. In her will, Rose gave one hundred dollars to appellant Geduldig, and a photograph to appellant Gordon, stating, with respect to each, that the bequest represented her "entire inheritance." Rose's will directed that the balance of her probate estate would pass to the Revocable Trust, to be disposed of according to its terms.

The Revocable Trust included gifts of certain tangible personal property to relatives and to a charity. It also directed payment of sizable specific amounts to David, to David's wife, to friends, to several charities, to a trust for the benefit of Rose's sister, and to a trust for the benefit of David's children. The Revocable Trust also directed payment of only one hundred dollars to each of the Daughters, and recited, with respect to each, that this sum was her "entire distribution from this Trust." The balance, if any, passed to David.

Rose transferred most of her assets to the Revocable Trust during her lifetime. At her death in October 1996, the Revocable Trust was valued at $10,756,659.

In a suit filed in the Circuit Court for Baltimore County, Case No. 97-1002, on January 31, 1997 (the "Prior Litigation"), the Daughters challenged their mother's right to exercise a power of appointment over the Marital Trust, contending that their father's will did not grant her a general testamentary power of appointment. On July 24, 1997, before that court ruled in the Prior Litigation, David paid the estate taxes for Rose's estate, including taxes attributable to inclusion of the Marital Trust in her estate. Less than three weeks after the tax was paid, the circuit court held, on cross-motions for summary judgment, that Rose had an inter vivos power of appointment only, and directed that the assets from the "Marital Trust therefore revert to [Nathan] Posner's estate to be distributed according to the residuary clause in his Will." Under this judgment, the Daughters would receive two-thirds of the Marital Trust and David would receive one-third.

On appeal, this Court held that Rose did not have a testamentary power of appointment over the assets of the Marital Trust, and affirmed the trial court. In dicta, we also stated that the language of Nathan's will was "insufficient to grant Rose Posner either an inter vivos or a testamentary power of appointment...." On July 21, 1999, the Daughters filed the complaint in this suit, in the Circuit Court for Baltimore City, against their brother and the trustee of the Marital Trust. They asserted that the trustee of the Marital Trust refused to distribute the Trust assets because he was concerned that David might file a claim against the Marital Trust for contribution to the federal estate taxes that David had paid. The Daughters sought declaratory relief, asking the court to rule that David was not entitled to claim any contribution from the Marital Trust for taxes that he paid. In response, David filed an answer and counterclaim for contribution, seeking judgment for the amount of the Maryland and federal estate taxes paid with respect to the Marital Trust, together with pre-judgment interest.

On cross-motions for summary judgment, the circuit court ruled that the three Posner children, as beneficiaries of the Marital Trust, must bear responsibility for the federal and Maryland estate taxes paid on the Marital Trust assets. The court ordered each of the Daughters to contribute $711,740.30 in federal tax and $193,212.72 in Maryland estate tax. The court declined to grant pre-judgment interest. The Daughters appealed from this judgment, and Posner cross-appealed over the denial of pre-judgment interest.

After this Court's decision in the Prior Litigation, David filed with the IRS a claim for a refund of $2,909,000, representing the taxes that were attributable to the Marital Trust. On July 16, 2001, while this appeal was pending, the IRS issued a technical advice memorandum, stating its position that the Marital Trust was includable in Rose's gross estate for federal tax purposes.

Both Rose's will and her Revocable Trust contained provisions addressing the payment of estate taxes. We will describe these more fully in our discussion.

DISCUSSION

I. Rose Posner Did Not Opt Out Of The Tax Apportionment Act

The Tax Apportionment Act sets forth how the federal estate tax and the Maryland estate tax shall be apportioned among the persons interested in an estate. It provides that "apportionment shall be made in the proportion that the value of the interest of each person interested in the estate bears to the total value of the interests of all persons interested in the estate." TG § 7-308(b). A "`[p]erson interested in the estate' means any person who is entitled to receive or has received... any property or interest in property included in the taxable estate of the decedent." TG § 7-308(a)(4). Under the statutory formula, the taxes on the Marital Trust would be paid from the interest of each person in that Trust. In other words, the Daughters would bear their proportionate share of the taxes attributable to the Marital Trust property, rather than having all the estate taxes paid by the residuary beneficiaries of Rose's probate estate or Revocable Trust.

As might be expected, the statute affords the testator an opportunity to opt out of the statutory directive. The operative language of the statute provides that it will apply "except as otherwise provided in the will or other controlling instrument[.]" TG § 7-308(k). In order to effectively opt out of the Tax Apportionment Act, however, the directive not to...