Marshall & Ilsley Trust Co. v. Comm'r of Internal Revenue (In re Estate of Clack)

• Decision Date: 29 February 1996
• Docket Number: No. 12557-91.,12557-91.
• Citation: 106 T.C. No. 6,106 T.C. 131
• Court: U.S. Tax Court
• Parties: ESTATE OF Willis Edward CLACK, Deceased, Marshall & Ilsley Trust Company, Co-Personal Representative, and Richard E. Clack, Co-Personal Representative, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

106 T.C. 131
106 T.C. No. 6

ESTATE OF Willis Edward CLACK, Deceased, Marshall & Ilsley Trust Company, Co-Personal Representative, and Richard E. Clack, Co-Personal Representative, Petitioner,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 12557-91.

United States Tax Court.

Feb. 29, 1996.

[106 T.C. 132]

Robert L. Kamholz, Jr., and John M. Byers, Milwaukee, WI, for petitioner.

Michael J. Calabrese, Chicago, IL, for respondent.

WELLS, Judge:^*

Respondent determined a deficiency of $2,284,008 in the Federal estate tax of the Estate of Willis Edward Clack (estate). Unless otherwise indicated, all section references are to the Internal Revenue Code in effect on the date of death of Willis Edward Clack (decedent), and all Rule references are to the Tax Court Rules of Practice and Procedure. The issue to be decided in this Opinion is whether the interest of decedent's surviving spouse in certain marital trust property is “qualified terminable interest property” (QTIP) within the meaning of section 2056(b)(7), where the passage to the surviving spouse of the interest in the property is contingent upon the coexecutors' QTIP election as to the property.¹

FINDINGS OF FACT

Some of the facts were stipulated for trial pursuant to Rule 91. The parties' stipulations are incorporated into this Opinion by reference and are found accordingly.

Decedent was born on July 21, 1923, and died testate on July 1, 1987, in Madison, Wisconsin. At the time of his death, decedent was a resident of Benton County, Arkansas. On August 4, 1987, the Benton County Probate Court admitted to probate decedent's last will, dated August 27, 1986 (the will), and issued letters testamentary to Richard E. Clack and the Marshall & Ilsley Trust Co., authorizing them to act as coexecutors of decedent's estate.² At that time and at the time of filing the petition in the instant case, the Marshall & Ilsley Trust Co. maintained its principal place of business in the State of Wisconsin, and Richard E. Clack was a resident of the State of Wisconsin.

[106 T.C. 133]

Decedent was survived by his wife, Alice Clack, his sons, Richard E. Clack and Robert A. Clack, and his daughter, Ann Clack Klimnowicz. During his lifetime, decedent was the owner and operator of a successful plastic extrusion company, Clack Corp. located in Winsor, Wisconsin. At the time decedent executed his will, his sons were active in the company. Richard E. Clack was “the number two person in the company”. Robert A. Clack had just started working in the business.

Decedent consulted an attorney in Wisconsin about preparing a will. Decedent was concerned about keeping the control of Clack Corp. in the family. Although decedent wanted his son Robert A. Clack to remain with the company, he wanted his other son Richard E. Clack to have control of the company. Decedent also wanted to minimize his estate taxes and to provide for his wife.

Decedent executed his will on August 27, 1986. The will names decedent's son Richard E. Clack and the Marshall & Ilsley Trust Co. of Milwaukee, Wisconsin, as co-personal representatives of his estate and cotrustees of the trusts created by the will.

Article I of the will provides for the payment of expenses (paragraph A) and taxes (paragraph B) from the residuary estate. Article II of the will bequeaths to decedent's wife all of decedent's personal effects and his interest in his personal residence. Article III of the will bequeaths to decedent's son Richard E. Clack 12,689 shares of the common stock of Clack Corp. Such bequest was made to recognize Richard E. Clack's activities in the management and success of Clack Corp. and was intended to ensure that Richard E. Clack retained control of Clack Corp.

Article IV of the will creates a marital trust for the benefit of decedent's wife as follows:

Qualified Terminable Interest Property Marital Trust. If my wife survives me, I give to my Trustee the minimum pecuniary amount which will qualify for the federal estate tax marital deduction and which will result in the smallest federal estate tax being payable by reason of my death. In computing this amount, my Personal Representative shall take into account the unified credit and the credit for state death taxes and deduction (except the marital deduction) available to my estate and all other items included in my gross estate for federal estate tax purposes, whether or not passing under this Will, which qualify for said deduction. My Personal

[106 T.C. 134]

Representative shall assume that all payments and legacies under the preceding Articles of this Will have been fully satisfied and shall take into account the state death tax credit only to the extent that use of the credit does not require an increase in state death taxes payable. I recognize that, depending upon the size of my estate, the year of my death and other factors, no amount may pass to this Marital Trust.

Article IV, paragraph C of the will states:

It is my intention that this bequest shall qualify for the federal estate tax marital deduction to the extent that my Personal Representative elects that any part or all of any amount passing under this Article IV be treated as qualified terminable interest property, and the terms of this Will shall be construed in accordance with such intent. My wife may require my Trustee to convert unproductive property into productive property within a reasonable time.

The will requires the trustee to pay the net income of the marital trust to decedent's wife “in convenient installments at least quarterly”. Any undistributed and accrued income at the time of the death of decedent's wife is to be paid to the wife's estate. The trustee is empowered to invade the principal of the marital trust as deemed necessary to provide for decedent's wife in order that she may maintain her standard of living. The marital trust terminates upon the death of decedent's wife. Upon termination of the marital trust, any assets remaining after payment of estate, inheritance, and succession taxes arising from the surviving spouse's death are to be added to the family trust created under Article V of the will (discussed below).

Article IV, paragraph D of the will provides for spousal disclaimer rights as follows:

My wife or her personal representative, by an instrument in writing delivered to my Trustee after my death, may disclaim all or any part of the distribution payable under this Article IV to the Trustee of the Qualified Terminable Interest Property Marital Trust under Paragraph B. Any part so disclaimed shall be held and administered by the Trustee as a separate trust in accordance with the terms of the Family Trust, except my wife shall not receive distributions of principal from this separate trust. If my wife further disclaims her income interest in this separate trust, then it shall be held and administered in accordance with the terms of the Family Trust as if she had predeceased me. Upon my wife's death, any assets segregated pursuant to the terms of this Paragraph shall be merged with other assets being held in the Family Trust.

[106 T.C. 135]

Article IV, paragraph F of the will provides for an election as follows:

My Personal Representative may elect that any part or all of any amount passing under this Article IV be treated as qualified terminable interest property for the purpose of qualifying for the marital deduction allowable in determining the federal estate tax upon my estate. While I anticipate that the election will be made for all of such property, my Personal Representative shall have the authority not to make the election should no election or a partial election be advantageous for some reason I have not foreseen. Any part of any amount passing under this Article IV with respect to which my Personal Representative does not so elect to be treated as qualified terminable interest property shall continue to be held by my Trustee and administered and distributed pursuant to the terms of the Family Trust hereunder.

Article V of the will provides for “Family Trust Administration”, in which the trustee is to receive the residue of decedent's estate in order to fund the family trust. Decedent's wife, children, and the issue of any deceased children constitute the beneficiaries of the family trust. The trustee has sole discretion to distribute income and principal to any one or more of the beneficiaries. Any income not distributed to the beneficiaries is to be added to the principal of the family trust.

Article IX, paragraph A of the will provides that the personal representative “may make such elections under the tax laws applicable to my estate as it determines should be made.”

On April 1, 1988, a U.S. Estate Tax Return, Form 706, was timely filed for the estate with the Internal Revenue Service Center in Austin, Texas. On the estate tax return, the coexecutors made the election under section 2056(b)(7) for the entire marital trust amount, which they valued at $4,162,439.24. The marital trust amount was computed as follows:

+---------------------------------------------------+
                ¦Probate estate ¦$6,685,474.21 ¦¦
                +-----------------------------------+--------------+¦
                ¦Add: Profit sharing plan benefit1 ¦320,327.89 ¦¦
                +-----------------------------------+--------------+¦
                ¦Total ¦7,005,802.10 ¦¦
                +-----------------------------------+--------------+¦
                ¦Less:¦Funeral expenses ¦(3,973.00) ¦¦
                +-----+-----------------------------+--------------+¦
                ¦ ¦Administration expenses ¦(338,849.06) ¦¦
                +-----+-----------------------------+--------------+¦
                ¦ ¦Debts ¦(20,811.95) ¦¦
                +-----+-----------------------------+--------------+¦
                ¦ ¦Mortgages & liens ¦(1,365.85) ¦¦
                +-----+-----------------------------+--------------+¦
                ¦Less:¦Specific bequest to spouse ¦(42,075.00) ¦¦
                +-----+-----------------------------+--------------+¦
                ¦ ¦Specific bequest to son ¦(2,436,288.00)¦¦
                +-----------------------------------+--------------+¦
                ¦Net amount to marital trust ¦4,162,439.24 ¦¦

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