In re Estate of Klarner

• Decision Date: 06 June 2005
• Docket Number: No. 04SC214.,04SC214.
• Citation: 113 P.3d 150
• Parties: In the Matter of the Estate of Marian P. KLARNER, deceased, Katz, Look & Moison, P.C., Arthur L. Daley and Denis F. Daley, co-trustees, Petitioners, v. Carol Shirley and Linda Turnwall, Respondents.
• Court: Colorado Supreme Court

113 P.3d 150

In the Matter of the Estate of Marian P. KLARNER, deceased,

Katz, Look & Moison, P.C., Arthur L. Daley and Denis F. Daley, co-trustees, Petitioners, v. Carol Shirley and Linda Turnwall, Respondents.

No. 04SC214.

Supreme Court of Colorado, En Banc.

June 6, 2005.

Ogborn, Summerlin & Ogborn, LLC, Michael Ogborn, Ricardo M. Barrera, LLC, Ricardo Barrera, Denver, for Petitioner.

Waller & Mark, P.C., William C. Waller, Jr., Greenwood Village, for Respondent.

KOURLIS, Justice.

Marian Klarner died on March 26, 2000 while she was the income beneficiary of a Qualified Terminable Interest Property ("QTIP") Trust established for her benefit by Albert Klarner at his death in 1982. Marian's gross estate, for federal and state estate tax purposes, included the QTIP Trust. Her Trustees sought to recover the estate taxes attributable to the QTIP Trust from that Trust. Two of the beneficiaries of the QTIP Trust objected. The Trustees then sought instruction from the probate court. The QTIP beneficiaries appealed the probate court's ruling to the court of appeals, which held that assessing any state estate taxes against the Trust was inappropriate. In re Estate of Klarner, 98 P.3d 892 (Colo.App.2003).

We accepted certiorari on two issues¹: whether the state estate taxes are properly apportioned against the QTIP Trust, and whether the QTIP beneficiaries are entitled to attorneys' fees. The parties now agree that federal law requires the QTIP Trust to bear its portion of federal estate taxes. The question before us is whether the federal statute demands the same outcome with respect to state death taxes attributable to the inclusion of the QTIP Trust within the gross estate. We hold that section 2207A of the Internal Revenue Code governs the apportionment of all estate taxes, federal and state, arising from the inclusion of the QTIP Trust in the decedent's estate. Based upon such determination, we conclude that the language in the testamentary documents was insufficient to waive apportionment of either federal or state estate taxes. We further determine that the court of appeals erred in its award of attorneys' fees. We therefore reverse and remand the case to the probate court for further proceedings.

I. Facts

Albert C. Klarner and Marian P. Klarner were married in Colorado. Albert and Marian did not have children from their marriage, but each of them had two children from their previous marriages. Albert had two daughters, Carol Shirley and Linda Turnwall ("Albert's daughters"), and Marian had two sons, Arthur L. Daley and Denis F. Daley ("Marian's sons").

In 1979 the law firm of Katz, Look & Moison, P.C., ("Law Firm") drafted a revocable living trust for Albert. The trust created a Marital Trust and a Family Trust upon Albert's death. In 1982 Albert amended the trust agreement, splitting the Marital Trust into two shares. The income from both Marital Trust shares was to be paid to Marian during her lifetime. Marian had the right to demand distribution of the full principal of the first share without limitation ("Marital Share One"). The second portion of the Marital Trust was to be poured into a QTIP Trust. Income from the QTIP Trust was payable to Marian during her life time. Contrary to Marital Share One, the QTIP Trust provided that the trustee could distribute only so much of the principal as the trustee, in his sole discretion, considered necessary for Marian's health, education, maintenance and support after taking into consideration the other assets available to her.

Albert had named Marian co-trustee of his entire trust. Absent exercise of the general power of appointment included in Marital Share One, all four children were equal residual beneficiaries of the Family Trust, Marital Share One and the QTIP Trust.

After Albert's death in 1982, Marian withdrew all assets from Marital Share One and placed them in her own trust ("Marian's Trust"). Marian renounced her interest in the Family Trust, which was equally distributed among the four children at that time. Marian reserved her rights under the QTIP Trust and continued to receive income payments until her death.

Before her death, Marian removed Albert's daughters as beneficiaries of her personal estate. She appointed her two sons and the Law Firm as co-trustees (collectively referred to as "the Trustees") of both Marian's Trust and the QTIP Trust.

Marian died in March 2000. Her taxable estate was valued at $5,039,315.52. The amount attributable to the inclusion of the QTIP Trust in her gross estate for tax purposes was $1,976,644.13. The estate paid estate taxes of $1,868,670.20, $323,203.34 of which was payable to Colorado.

In May 2000, the Trustees sent a letter to Albert's daughters informing them of the way in which the Trustees planned to apportion the payment of taxes and estate administration expenses. The Trustees proposed to apportion taxes and administrative expenses between the QTIP Trust and Marian's Trust by pro-rating them according to the amount that each trust represented with respect to the aggregate value of Marian's gross estate.² In support of that plan, the Trustees relied on language from Albert's Amended Trust, Marian's Last Will and Testament, Marian's Trust, and section 15-12-916(2), C.R.S. (2004).³ At that time, the Trustees also prepared accountings and made partial distributions equally to all beneficiaries. Albert's daughters disputed the proposed allocation of taxes and administrative expenses against the QTIP Trust.

II. Proceedings Below

As a result of the dispute, the Trustees filed a Petition for Instructions with the Denver Probate Court in March 2002. The Trustees sought guidance on the issues of: (1) whether the formula for apportionment, codified at section 15-12-916(2), was applicable and whether the Trustees had included the relevant assets of the Trust Estate in deriving the proposed method of apportionment; (2) whether the fees and expenses associated with the administration of the Trusts should be apportioned among all beneficiaries of the Trusts in the same proportion as the estate taxes; (3) whether the beneficiaries of certain assets that were owned by Marian, outright and free from the Trust, should be liable for contribution towards the payment of estate taxes and administrative expenses; and (4) whether the additional attorneys' fees associated with the Petition for Instruction should be borne by the estate as an administrative expense or by the beneficiaries who had challenged the Trustees' method of apportionment.

Albert's daughters responded, asserting that the testamentary instruments were clear and unambiguous in waiving apportionment of taxes⁴; that the Trustees had an inherent conflict of interest; and that if section 15-12-916 applied, it applied to Marian's non-probate transfers as well.

In their reply, the Trustees raised section 2207A of the Internal Revenue Code, and its direction concerning apportionment.

Judge Stewart of the probate court, in an order dated June 2002, held that section 2207A of the Internal Revenue Code authorized Marian's estate to recover from the QTIP Trust the federal and state estate taxes accrued by the inclusion of the value of the QTIP Trust property in Marian's taxable estate. The court recognized that section 2207A allows the testator to waive the right of recovery but held that the language of Marian's estate documents was insufficient to indicate such intent.

The probate court held that, in Colorado, the language in the will or trust must refer specifically to the existence of the QTIP Trust and state the testator's intent that the right of recovery not be exercised against that asset. The probate court thus directed the Trustees to reimburse Marian's estate from the QTIP Trust in proportion to its percentage of Marian's gross estate pursuant to section 15-12-916.

The probate court denied both parties' requests for attorneys' fees. Albert's daughters filed a motion for reconsideration in which they took the position that section 2207A applied only to the recovery of federal taxes. The court denied that reconsideration motion and a motion to compel disclosure of documents. Albert's daughters appealed the decision to the court of appeals.

On appeal, the parties agreed that Marian's estate may recover federal estate taxes from the QTIP Trust pursuant to Internal Revenue Code section 2207A. However, they disagreed as to the calculation of that apportionment. The parties also disagreed as to whether the QTIP Trust was required to pay any portion of state estate taxes.

The court of appeals held that Marian's estate documents did not waive the right of recovery from the QTIP Trust for federal taxes. Accordingly, the court of appeals affirmed the probate court's order allowing Marian's estate to recover from the QTIP Trust the amount equal to the difference between the total federal tax against the estate and the amount payable if the QTIP Trust had not been included in the gross estate.⁵ However, that court further held that section 2207A applies only to federal estate taxes and the apportionment of state death taxes is subject to section 15-12-916. The court opined that the language of Marian's Trust was sufficient, under the Colorado statute, to waive apportionment. Accordingly, the court of appeals reversed the probate court's order with respect to contribution of state taxes from the QTIP Trust. The court of appeals also concluded, as a matter of law, that Marian's sons and the Law Firm had a conflict of interest with respect to the QTIP Trust and remanded to the probate court to determine the appropriate remedy, including reasonable attorney fees and costs that should be awarded to Albert's daughters.

The case now comes before us on the issue of the apportionment of state estate taxes and the award of attorneys' fees against the Trustees.⁶

III. Estate Taxes on Qualified Terminable Interest Property

Prior to 1981, the Internal Revenue...